Companies Bill needs a relook

A change of guard at the corner office of the Ministry of Corporate Affairs (MCA) seems to have breathed fresh oxygen into a comatose Companies Bill, 2009. It is expected that the Bill would obtain legislative sanction soon. Though the final draft of the Bill is public, radical changes from Bill No 59/2009 are not expected, though there have been many changes in legislation supporting the Companies Act, 1956 in the interregnum.

New Schedules VI and XIV have been announced by the MCA and the Institute of Chartered Accountants of India (ICAI), XBRL makes its entry and IFRS-compliant Ind-As Standards have been announced.

Apart from clipping about 232 sections from its predecessor, the Bill seeks to improve corporate governance norms and provide support systems for shareholder rights.

Accounts and Audit

It is expected that Clause 119 of the Bill which states that the Government may notify accounting standards that apply to companies or a class of companies would incorporate Ind-As standards when they become applicable. Chapter X of the Bill and its nine sections would be of interest to auditors. Clause 123 of the Bill contemplates only individuals and partnership firms as auditors of companies. It is expected that the Bill being tabled would include limited liability partnerships (LLPs) since its omission would invalidate the appointments of LLPs as auditors.

Clause 126(9) makes a blanket statement that every auditor shall comply with the auditing standards. The next sub-section appoints the National Advisory Committee on Accounting and Auditing Standards (NACAS) as the in-between agency to notify auditing standards.

A proviso states that until the Government and NACAS agree on auditing standards, the ones issued by the ICAI would apply.

As auditing standards apply to members who undertake the audit, empowering the auditing standards issued by the ICAI directly without having to await the blessings of NACAS seems appropriate.

Auditors are barred from providing accounting and book-keeping services, internal audit, design and implementation of any financial information system, actuarial services, investment advisory services, investment banking services, rendering of outsourced financial services and management services.

These provisions have been worked around in some instances by getting appointments for these barred services from another related entity. A disclosure regarding any potential conflict of interest would make the provisions look holistic and complete.

Penal provisions

If any auditor messes up on the reporting provisions, provides barred services or arranges to have the report signed by others though he has conducted the audit, the penal and criminal provisions of Clause 130 would kick in. Monetary penalties could range between Rs 25,000 and Rs 5 lakh.

If the contravention is proved to be wilful and on purpose, the auditor could be poorer by amounts that could range between Rs 1 lakh and Rs 25 lakh and could also end up in Tihar/Chanchalguda or similar places for one year. To ensure that the provisions hit the auditor where it hurts the most, he would also have to refund the remuneration received by him and pay for damages to the company or to any other persons for loss arising out of incorrect or misleading statements of particulars made in his audit report.

If auditors were cautious post-Satyam, they would be ultra-cautious post the Companies Bill. Provisions regarding the auditor to the nation — the Comptroller and Auditor General of India(CAG) - remain similar to the present. Provisions regarding Cost Audit as mandated by Clause 132 of the Bill have already been implemented in part by the Government recently.

Rethinking the provisions

The Bill should rethink about the new Schedule XIV for Ind-As. IFRS standards put the onus on companies to specify useful lives for all their property, plant and equipment. The Schedule XIV for its Indian equivalent has erred in looking at the previous version as a base to determine useful lives instead of having a fresh look at/ leaving it to the management of the entity. Not many entities moving over to Ind-As would be keen on knowing the useful lives for juice boiling pans ( karhais ) or sugarcane crushers (indigenous kolus and belans ). This could also result in a face-off between a cautious auditor who would look upon the Schedule as a benchmark for useful lives and an aggressive management who would feel that only they are technically competent to ascertain the useful lives of the assets they own. History has taught us that it takes ages for the Companies Act to be amended.

The Government would do well to take a quick relook at the provisions in the Companies Bill, 2009 before introduction and make the provisions relevant to the regulatory environment instead of having to play catch-up regularly.

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

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