The Bottomline: Class action even against auditor

PwC

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To protect investor interest, Section 245 of Companies Act 2013 has introduced the concept of class action suits, through which shareholders can initiate legal action against the company and auditors in the event of fraudulent activity. In a class action suit, a large group of individuals collectively bring a claim to court and/or in which a particular class of defendants are being sued. A class of shareholders can now claim damages or compensation or demand other suitable action against the auditor, including the audit firm, by filing an application with the Tribunal. The concept of collective lawsuit has its origin in the US, where it is widely prevalent.

Joint auditor risks

Companies Act 2013 proposes that the members of a company could ask for audit by more than one auditor. An auditor spends years in acquiring and understanding the critical elements of the financial statements and business of his/her client. Audit not only involves obtaining knowledge of, and experience with the client’s industry, but also careful planning that takes into account client-specific risks and controls. The concept of joint audit would not only lead to increased cost for clients, as both firms would have to be paid for the engagement, it may also impact audit quality. When two firms undertake a joint audit, there is always a possibility that it will result in duplication of effort, resulting in unnecessary cost and oversight due to lack of co-ordination.

Ushering in the ‘resident director’

Under the new Companies Act, a new concept of ‘resident director’ has been introduced. Every company should ensure that at least one director stays in India for at least 182 days in the previous calendar year. This applies to all companies — listed, unlisted public and private limited companies. The definition of ‘residency’ is along the lines prescribed under the Income-tax Act and Foreign Exchange Management Act. While on one hand directors have been allowed to participate in board meetings through video-conferencing and other audio-visual means, the importance of physical presence is also duly recognised.

New regime for ‘alternate director’

The new Companies Act has laid to rest one of the long-standing ambiguities related to ‘alternate director’. Under Companies Act 1956, the ‘alternate director’ was supposed to vacate office on the return of the original director to the ‘state’ in which board meetings are ordinarily held. Under the new provisions, the concept of ‘state’ has been done away with, and the alternate director will vacate office on the return of the original director to India.

The other interesting change is with regard to the appointment of the alternate director. Alternate can be appointed only when the original director is absent from India for three months or more. Further, a person can be appointed as an alternate director for an ‘independent director’ only if he/she meets the qualifications of independence prescribed under the new Act.

Published on October 20, 2013

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