Impact of the Companies Act, 2013 on audit and auditors
The long-awaited Companies Bill 2013 was finally passed by the Lok Sabha on 18.12.2012 and by the Rajya Sabha on 8.8.2013. After receiving the assent of the President of India on 29.8.2013, it has now become the Companies Act, 2013.
The new Companies Act, 2013 has introduced many new concepts and has also streamlined many requirements by incorporating new definitions. It also provides new concepts in the country. A few of the important aspects have been discussed below.
Provisions dealing with audit and auditors:
There is a drastic change in provisions under the Companies Act, 2013 relating to audit and Auditors as compared to the old Act of 1956. The new Act has tried to improve Corporate Governance and to strengthen the existing rules and regulations.
1. Compulsory rotation of auditors: Rotation of auditors has now become mandatory for all companies both listed as well as those unlisted and private companies which fulfill the prescribed criteria. These include unlisted public companies having a paid up share capital of Rs. 10 crore or more and private limited companies having a paid up share capital of Rs. 20 crore or more as well as companies having public borrowings from financial institutions, banks, etc. Such companies will now require rotating their auditors.
Rotation of Auditors till date was restricted to only certain class of companies; as such 90% of the companies remained outside the domain of rotation. The new Act will give benefit to small and medium practitioners working as auditors.
2. Maximum tenure of an audit partner or firm: The new Act limits the maximum tenure of an auditor and the firm doing audit, to five years and ten years respectively. Moreover, shareholders can as per their discretion determine the tenure of the audit partner at shorter terms or may conduct a joint audit.
3. Cooling period: There shall be a cooling period of five years after completing the tenure of Audit.
An Auditor needs time to understand the job of the Company. If an auditor is changed frequently, it will impose heavy burden on audit as well as the Company.
4. Maximum number of audits: The earlier Companies Act together with the Institute of Chartered Accountants of India had limited the number of audit companies to thirty. An audit partner could not work as an auditor in more than twenty public companies of which not more than ten companies should have a paid up share capital of more than Rs. 25,00,000/-.
The new Companies Act, 2013 do not prescribe for any limitations on the nature of the companies. However, the maximum number of audits of an audit partner is now twenty including the audits of small private companies.
The limit is likely to create difficulties for the auditors. With the advancement in accounting and auditing, now professionals can work for a much larger population than the limit provided.
5. Reporting Frauds: It was provided in the new Act that the auditor should inform the Central Government within a time limit and in the prescribed form, if he had reason to believe that an act amounting to fraud is being committed against the company by any of its employees.
According to the new act the auditor should also forward such report to the board or the audit committee immediately after he learns about the fraud asking for their reply within 45 days.
On receipt on the reply of the board or the audit committee, the auditor should forward the reply with his report with his observations to the central government within 15 days.
If no reply has been received by the auditor from the board or the audit committee, he should send the audit report along with the details of his report to the board or the committee for which he has failed to receive any observations to the central government.
Now Section 143 (15) of the new Act provides that if any auditor does not comply with any of the provisions of the act, he shall be punishable with fine of Rs. 1 lakh to Rs. 25 lakh. Hence, the new Act imposes more responsibility on the auditor to be careful while auditing a company and to check the acts of the Audit staff and trainees.
6. Internal Audit: Now Internal Audit is mandatory for all the Companies with some limitations. With the help of the new provisions, companies may appoint their employees who are professionals as Internal Auditors.
The new provisions relating to accounts and audit as have been provided in the Companies Act, 2013 will have tremendous impact on the auditors. Some of the provisions may appear harsh as they are likely to influence the development of the profession of Chartered Accountants, but small and medium size audit firms will be able to continue the audit practice.