Sub: Request for appointment to discuss urgent issues related to auditors under Companies Act 2013

Transcription

1 18 th June 2015 To CA. Manoj Fadnis Ji Honourable President New Delhi Sub: Request for appointment to discuss urgent issues related to auditors under Companies Act 2013 Respected Sir, Please refer to my earlier communication made on 11 th May 2015 and reminder sent on 15 th June 2015 regarding the two important issues affecting all auditors under Companies Act I have received a reply from the related committee chairman on 15 th June 2015, which is summarised in the chart below: Issue Chairman CL&CGC reply Our Submission Definition of Management Services - There is no clarification from MCA or This has been taken up under Ease of Business for being left to the to decide. However, Ministry decision is pending. This has been raised at various levels and is part of the list being followed up by us with MCA It is nearly around 2 years that the relevant provision is stated in the Companies Act. What happens today when a statutory auditor files company s ITR or TDS Return or any other statutory compliance, where no certification is required? Is he disqualified u/s 144? Penalty on auditor would be levied in case he has provided these services in contravention of s Who is to clarify? When it would be clarified? It is nearly 2 years since this issue is there, don t we have enough resources to work upon it. The extended time given has already expired on 31 st March 2015?

2 The CA has stated that when the company fails to ratify existing auditor, the rules give powers to the Board to appoint another auditor, whereas for removal u/s 140 (1), CG approval is required. The concern is that this could be misused to circumvent the need for removal by not ratifying However, my view is that this is already addressed. The Rule extract is as under: Explanation.- For the purposes of this rule, it is hereby clarified that, if the appointment is not ratified by the members of the company, the Board of Directors shall appoint another individual or firm as its auditor or auditors after following the procedure laid down in this behalf under the Act. The underlined section clearly puts the onus of following the procedure laid down in this behalf - which can only mean removal and change of auditor. Please tell what should all members do today? In such a case it is not removal, but the auditor office becomes vacant resulting in casual vacancy. And casual vacancy can be filled by the Board. Please see the letter dated 11 th May 2015 addressed to your honourable office sir. The solution is mentioned therein (copy attached). The Chairman CL&CGC doesn t think that there is even any issue, so we understand that this matter has never been taken up by the Institute ever with MCA. Please understand the gravity of matter and act seriously on urgent basis. I am sorry to say, but it seems that neither your office nor the relevant committee nor any of the Council members or Regional Council members is able to appreciate the gravity of the matter. The issues are nearly two year old and we have not been able to address any of them inspite of best talent available with the Institute. Please give us an appointment so that we can discuss the gravity of the issue with your honourable office. I along with my senior colleagues and expert in company Law CA. Anil Sharma ji, CA. Arun Saxena ji and CA. Anil Gupta ji, seek your appointment on urgent basis to discuss these issues. Please provide an appointment on urgent basis and oblige. Thanking You Warm Regards Encls: (1) Letter dated 11 th May 2015 to your honourable office. (2) Reminder dated 15 th June 2015 to your honourable office.

3 15 th June 2015 To CA. Manoj Fadnis Ji Honourable President New Delhi Sub: Reminder for Clarifications required for our members under Companies Act 2013 Respected Sir, At the outset I congratulate you to be appointed as a member in the Committee constituted by Ministry of Corporate Affairs to make recommendations on implementation of Companies Act On behalf of several of our members I had communicated a letter dated 11th May 2015 to your honourable office (copy enclosed) relating to two important issues directly affecting our members in practice. I appreciate your office s prompt response to forward the same to the appropriate committee to look into. However, it s more than a month now since that communication, but no response / clarification has been there from relevant committee or your office on these issues. The issues are: Clarification on what is Management Services u/s 144(h) of the Companies Act 2013 Pursuing with MCA to amend Rule 3(7) of Companies (Audit and Auditors) Rules, 2014 which provide for procedure in case the company does not ratify appointment of auditor annually in its AGM. It is more than a year and half now since these provisions were made applicable. These issues are pending since then. I am sure our Institute / Related Committee / Council members must have taken some action on both these issues, I would be highly obliged if it is shared with the members at large for their benefit. There is unreasonable delay is resolving these issues and it could have direct financial and penal implications on all small and medium auditors. Please expedite to clarify in the best interest of the profession. Ready to contribute in any way to reach to a conclusion on these issues Thanking You Warm Regards Encl: Letter dated 11 th May 2015 to your honourable office.

4 11 th May 2015 To CA. Manoj Fadnis Ji Honourable President New Delhi Sub: Clarifications required for our members under Companies Act 2013 Respected Sir, Several provisions of the Companies Act 2013 are causing severe hardship to small private limited companies. However there are two provisions which are directly related to auditors (CHARTERED ACCOUNTANTS), which require your immediate attention for the benefit of all members. The issues that need urgent attention are:- MANAGEMENT SERVICES Problem A statutory auditor cannot render management services to the company of which he is the auditor, its holding and / or its subsidiary company. No member of with absolute authority knows that what these services are. They are left on their wisdom to draw inferences from various available sources. Reason There is no clarification from either MCA or that what constitutes Management Services as per section 144(h) of the Companies Act, through its Regulations and Code of Ethics has clarified that what are Management Consultancy and Other Services which a Chartered Accountant can do. However, these are not Management Services as per section 144(h) of the Companies Act, As per Proviso to section 144 of the Companies Act, 2013 the statutory auditor has to comply with provisions of said section before the closure of the first financial year after the date of commencement of the said section. The said date expired on 31 st March A small and medium practitioner is not aware that if he provides the following services, would he be covered under the said section and is disqualified to act as statutory auditor and attract related penal provisions under Companies Act 2013: Filing VAT / Service Tax Returns

5 Filing IT / TDS Returns Filing ROC forms which are not to be certified by any professional Issuing opinions on Tax, FEMA or other issues Preparing CMI data, etc The delay in clarification may have already resulted in non-compliance with section 144(h) of the Companies Act 2013 as many auditors may be providing these services even after 1 st April 2015 Solution should issue a clarification / guidance that what constitute Management Services as per section 144(h) of the Companies Act, 2013; or should act fast to persuade MCA to clarify what are the Management Services as per section 144(h) of the Companies Act, RATIFICATION OF AUDITORS Problem An auditor is now to be appointed for 5 years by any company under Companies Act If the company wants to remove an auditor before its term it has to take prior approval from Central Government (CG). However, if the company does not ratify the appointment of the auditor in each AGM, the Board has the power to appoint any other CA as auditor of the company. This would hamper the independence of auditors and give easy way out to non-compliant companies to use this route to remove auditors without taking prior approval from CG. Reason According to section 139(1) a company now has to appoint an auditor for 5 years in AGM. However, first Proviso to said section says that the company shall place the matter relating to such appointment for ratification by members in each AGM. What happens when a company fails to ratify the appointment? The solution is given in Explanation to Rule 3(7) of Companies (Audit and Auditors) Rules, 2014 which states that if the appointment is not ratified by the members of the company, the Board of Directors shall appoint another individual or firm as its auditor. The management may find out ways to not ratify the appointment of the auditors in AGM, in order to remove the auditors, without seeking prior approval of CG (which is required as per 140(1) of the Act) hampering the independence of auditors. Solution should persuade MCA to amend Rule 3(7) of Companies (Audit and

6 Auditors) Rules, 2014 to provide that: if the appointment is not ratified by the members of the company, the appointment shall be deemed to be ratified unless the auditor is disqualified u/s 141(3) of the Act. There is a similar provision in case company does not appoint or reappoint existing auditors in AGM under section 139(10), where in such a case the existing auditor continues to be the auditor. An early solution to these issues is in the best interest of our CA fraternity. I am sure our Institute must have already done great work on both these issues, I would be highly obliged if it is shared with the members at large. Any further delay is resolving these issues would have direct financial and penal implications on all small and medium auditors. Ready to contribute in any way to reach to a conclusion on these issues Thanking You Warm Regards