K. Srinivasan looks at the Irani Committee recommendations on the revision of accounts and auditors' disqualifications

K. Srinivasan

PARA 14 of the Irani Committee's report reads: "It was brought to the notice of the committee that provisions should be made in law for revision of accounts after its adoption/approval by the shareholders subject to conditions laid down under the law.

This should, however, be possible only in cases where changes in law necessitate restatement with retrospective effect or for rectifying the errors apparent from the records."

This suggestion is rather vague. The problem is an old one for which a satisfactory solution is not difficult to evolve. When a search of a company's premises has been conducted under the Income-tax Act and income is found to have been concealed resulting in the reopening of some past assessments, the least that the company concerned can do is to declare/disclose/incorporate the relevant income and assets, as also the tax paid out of the hidden resources in the books for the latest financial year for which the profit and loss account, and so on, are yet to be approved in the company's annual general meeting (AGM).

This implies that those found in possession of the secreted assets not only confess that they belong to the company but also arrange to hand them over to the company and those in control and management of the company are exonerated of their criminal liability under the relevant laws.

Serious errors of omission or commission which are detected or discovered by the taxmen or any regulatory authority or which are disclosed voluntarily by or on behalf of the company should justify appropriate revision of the accounts/financial statements, notwithstanding their having been approved or acted upon by the company, with or without the knowledge of the general body in the past. Several matters relating to a company have been referable to the High Court, and under amendments to the Companies Act, are to be decided by the National Company Law Tribunals, which are yet to be constituted, for example, mergers/amalgamations/demargers/reduction in a company's capital and so on.

There is no reason why the question of revision of accounts which becomes necessary and which has not been determined by any of the competent statutory authorities should not be referable to the National Company Law Board either by the company's own board of directors or the Ministry of Company Affairs for appropriate decision.

The action or inaction of the board may be made appealable to the National Company Law Tribunal (NCLT) by any shareholder of the company with not less than 2 per cent interest in the company's equity capital or by the designated authority in the Ministry/Department of Company Affairs.

Disqualification of auditors

The statutory auditors, as also some of the officers and staff working in the accounts or internal audit or costing section of a company's establishment, can be `insiders' in the sense of their coming by information of value which they can conceivably utilise to their personal advantage.

What protection they should get in the event of their turning into informers/whistleblowers is a problem which should be gone into separately as a matter of state policy.

But it will be reducing the law to a mockery if a chartered accountant being already indebted to the extent of Rs 1,000 or even Rs 5,000 or becoming a debtor during his tenure as auditor is treated as a disqualification for his appointment or retention as a statutory auditor.

This becomes counterproductive if a false debit is made by the company itself to a personal account opened by it in the name of the chartered accountant concerned.

While it may be desirable to leave the issue to be discussed/debated by the Institute of Chartered Accountants of India, it is obvious that there should always be a provision for an appeal by the affected chartered accountant to the NCLT before the `disposal' of the matter by the company.

Cost audit

It is not possible to appreciate the Irani Committee recommendation that government approval for appointment of a cost auditor for carrying out any cost audit that may become essential is not necessary. This recommendation is based on the assumption that costing is in the interest of most companies in the prevailing competitive environment. It fails to give the existing practice the consideration that it demands.

Only a company engaged in production, processing, manufacturing or mining is mandatorily required to maintain the records that are mentioned in clause (d) of sub-section (1) of Section 209 of the Companies Act. There is no bar on a company employing a cost accountant for its own purposes.

Audit of cost accounts is, however, to be carried out if and when so directed by the Central Government in relation to specified activities which are governed by the cost accounting record rules framed by the Government.

The Government is clearly entitled to have the cost-audit done by an auditor nominated by it; and the person so engaged vacates his post as soon as he submits his report to the Government. He is disqualified for appointment as internal auditor or as a member of the company's audit committee. The Irani Committee was evidently unaware of these facts when it made its untenable recommendation.

The position of a special audit is similar. The power of the Central Government to direct such a special audit under Section 233A of the Companies Act is indisputable either on legal or factual grounds. The Government is the authority that calls for the audit and is legally competent to appoint a person who may fill the bill.

The special auditor who will have the same powers as an auditor of the company under Section 227 of the Companies Act shall have to make his report to the Government which may take such action on it as it considers necessary in accordance with the provisions of the Companies Act or any other law for the time being in force. In this context the Irani Committee's observation that a "special audit taken in isolation would serve no useful purpose and may be dispensed with" appears to be an uninformed conclusion divorced from reality.

The Committee's comments on `Audit of Government companies' will be taken to be totally one sided and biased, particularly by anyone had occasion to see the public sector in operation from the inside as well as an outsider. It is hardly fair to draw any inference on the Committee's recommendations without hearing what the Government and those serving currently or those who have done so in the past have to say in this connection.

The Comptroller and Auditor General performs his functions in respect of a government undertaking as an authority entrusted with them under the Constitution of India, whether what he says is strictly realistic or not and whether it is palatable or not or whether the check is redundant to any extent are not matters on which any one can comment in general terms and this is not the occasion for undertaking such an enquiry. It will be unjust to twit at a function which a committee of the Parliament applies its mind every year.

Without going into the merits of the Irani Committee's views in para 40 of its report, the presumption implicit in it that any test or supplementary audit that the C&AG gets done is superfluous since it would duplicate audit work already done by the statutory auditors.

Any such superfluity can cause no damage to the private sector or the economy. In any case it may be proper for the Ministry of Company Affairs to request the C&AG to let it have his comments on the Irani Committee's recommendation/remarks before giving them the quietus they deserve.

There can be no two views on the fact that as long as there are government companies the Constitution requires that the C&AG should discharge certain responsibilities in regard to them and a Parliamentary Committee goes into his report.

The Parliamentary Committee's attention can always be drawn by the public to any deficiency in the C&AG's service or any duplication in his work come to public notice at any time.

(By arrangement with Corporate Law Adviser, New Delhi.)

(This article was published in the Business Line print edition dated September 29, 2005)
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