The Hindu Business Line : We have a `banned' list now

OLIVER Wendell Holmes remarked: "The life of the law has not been logic: it has been experience." Based on its past experience, the Department of Company Affairs (DCA) has embarked on a Concept Paper (CP) on the Companies Act, 1956 with the intent of simplifying the law.

Old wine, new bottle

A cursory look at the audit and accounts provisions would give one the impression that they are old wine in a new bottle.

The need to maintain books of account of a company for a period of eight years with vouchers remains. An accounting firm can be the auditor for a maximum of 30 public limited companies although this limit is per partner. The appointment of auditors, the report of the auditors et al have not been tampered with.

A rule has been introduced to support Clause 58(2)(g) of the CP, wherein it has been stated that where a person or a firm of auditors have been found to be guilty of professional misconduct, reprimanded and removed from the membership of the Institute of Chartered Accountants of India (ICAI), for a period exceeding 30 days in a three-year timeframe, the auditor is supposed to disclose this fact to the board of directors at the time of his appointment who in turn would need to convey the bad news about their auditor to the shareholders.

A reprieve given to the auditor is that the period would commence from the date the order is confirmed by the court if the order from the ICAI demands so. If the intent is to prevent lax auditors from being auditors, the three-year timeframe appears unnecessary. Disciplinary proceedings of the ICAI happen at their own pace.

An offence pronounced in 2002 may pertain to the year 1997. It would be preferable to make auditors "disclose all" offences, including historical ones, since what is important is the nature of the offence than its age.

The law-drafters could have removed the clause that states that auditors have to ensure that cess payable under the provisions of the Act for the purpose of rehabilitation, revival or protection of assets of a sick industrial company have been paid and, if not, the details are to be mentioned.

With the BIFR itself in a coma and auditors having seen many more cesses being imposed and withdrawn, this clause is needless.

Banned services

For probably the first time in the country, we have a list of "banned" audit services.. Financial information systems design and implementation, actuarial services, management functions, legal and expert services — all "banned services" as per Section 201 of the Sarbanes Oxley Act could have been added to make the list complete.

The ICAI has recently permitted "networking" by chartered accountants with other professionals. A CA who networks with a cost accountant with the sole intention of nabbing a few cost audits, courtesy the alliance, could find himself short-changed with this provision. The clause relating to cost audit has a provision that the same person shall not be appointed as the auditor of the company.

Interpreting this, it appears that the emphasis is that the same person should not conduct both statutory and cost audits.

The CP seems to be giving a lot of importance to cost audit, courtesy a clause that states that once the appointment order has been given "the company should give all facilities and assistance to the person appointed for conducting the cost audit".

Statutory auditors should be ruing the lack of such a proviso. In keeping with the increasing importance of the Audit Committee, a company with a paid-up capital of Rs 5 crore needs to constitute an Audit Committee with a minimum of two independent directors.

Sweeping powers have been given to the Committee so constituted to ensure that the company comes out without a blemish on the corporate governance and disclosure fronts.

(The author is a Hyderabad-based chartered accountant.)

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