THE COMPANIES BILL, 1997

THE COMPANIES BILL, 1997

PART VI

MANAGEMENT AND ADMINISTRATION

CHAPTER I : SECTIONS 183-191

Audit

183 Appointment and remuneration of auditors—

(1) Every company shall, at each annual general meeting, appoint an auditor or auditors to hold office from the conclusion of that meeting until the conclusion of the next annual general meeting and shall, within thirty days of the appointment, give intimation thereof to every auditor so appointed:

Provided that before any appointment or re-appointment of auditor or auditors is made by any company at any annual general meeting, a written certificate shall be obtained by the company from the auditor or auditors proposed to be so appointed to the effect that the appointment or re-appointment, if made, will be in accordance with the limits specified in sub-section (3).

(2) Every auditor appointed at any annual general meeting in place of a retiring auditor; shall within thirty days of the receipt from the company of the intimation of his appointment, inform the Registrar in writing that he has accepted, or refused to accept, the appointment.

(3) No company or its Board of directors shall appoint or re-appoint any person who is in employment elsewhere or a firm as its auditor if such person or firm is, at the date of such appointment or re-appointment, holding appointment as auditor of twenty-five companies or more;

Provided that in the case of a firm of auditors, the "specified number of companies" shall be construed as the number of companies specified for every partner of the firm who is not in employment elsewhere:

Provided further that where any partner of the firm is also a partner of any other firm or firms of auditors, the number of companies which may be taken into account, by all the firms together, in relation to such partner shall not exceed twenty-five companies in the aggregate.

Provided also that where any partner of a firm of auditors is also holding office, in his individual capacity, as the auditor of one or more companies, the number of companies which may be taken into account in his case shall not exceed twenty-five companies, in the aggregate.

(4) At any annual general meeting, a retiring auditor, by whatsoever authority appointed, shall be re-appointed, unless-

(a) he is not qualified for re-appointment;

(b) he has given the company notice in writing of his unwillingness to be re-appointed;

(c) a resolution has been passed at that meeting appointing somebody instead of him or providing expressly that he shall not be re-appointed; or

(d) where notice has been given of an intended resolution to appoint some person or persons in the place of a retiring auditor, and by reason of the death, incapacity or disqualification of that person or of all those persons, as the case may be, the resolution cannot be proceeded with.

(5) Where any company at an annual general meeting fails or omits to pass resolution appointing or re-appointing an auditor, or where the auditor has refused to be so appointed or re-appointed , the Central Government may appoint a person to fill the vacancy.

(6) The company shall, within seven days of the Central Government's power under sub-section (5), becoming exercisable, give notice of that fact to that Government; and, if a company fails to give such notice, the company, and every officer of the company who is in default, shall be punishable, with fine which may extend to five thousand rupees.

(7) The first auditor or auditors of a company shall be appointed by the Board of directors within one month of the date of registration of the company; and the auditor or auditors so appointed shall hold office until the conclusion of the first annual general meeting:

Provided that-

(a) the company may, at a general meeting, remove any such auditor or all or any of such auditors and appoint in his or their places any other person or persons who have been nominated for appointment by any member of the company and of whose nomination, notice has been given to the members of the company not less than fourteen days before the date of the meeting; and

(b) if the Board fails to exercise its powers under this sub-section, the company in general meeting may appoint the first auditor or auditors.

(8) (a) The Board may fill any casual vacancy in the office of an auditor; but while any such vacancy continues, the remaining auditor or auditors, if any, may act:

Provided that where such vacancy is caused by the resignation of an auditor, the vacancy shall only be filled by the company in general meeting.

(b) Any auditor appointed in a casual vacancy shall hold office until the conclusion of the next annual general meeting.

(9) Except as provided in the proviso to sub-section (7), any auditor appointed under this section may be removed from office before the expiry of his term only by the company in general meeting, after obtaining the previous approval of the Central Government in that behalf.

(10) The remuneration of the auditors of a company-

(a) in the case of an auditor appointed by the Board or the Central Government, may be fixed by the Board or the Central Government, as the case may be; and

(b) subject to clause (a), shall be fixed by the company in general meeting or in such manner as the company in general meeting may determine.

Explanation: For the purposes of this sub-section, any sums paid by the company in respect of the auditors' expenses shall be deemed to be included in the expression "remuneration".

184 Provisions as to resolutions for appointing or removing auditors.-

Where it is proposed to appoint a person, other than a retiring auditor, or that a retiring auditor shall not be re-appointed, special notice shall be required for a resolution to be moved at an annual general meeting, along with a deposit of ten thousand rupees, which shall be refunded to such persons or, as the case may be, to such member, if the person succeeds in getting appointment as auditor.

185 Qualifications and disqualifications of auditors.-

(1) A person shall not be qualified for appointment as auditor of a company unless he is a chartered accountant in practice within the meaning of sub-section (2) of section 2 of the Chartered Accountants Act, 1949 (38 of 1949).

Provided that in a firm whereof all the partners practising in India are qualified for appointment as aforesaid may be appointed by its firm name to be auditor of a company, in which case any partner so practising may act in the name of the firm.

(2)

(a) Notwithstanding anything contained in sub-section (1), but subject to the provisions of any rules made under clause (b), the holder of a certificate granted under a law in force in the whole of or any portion of a Part B State immediately before the commencement of the Part B States (Laws) Act, 1951 or of the Jammu and Kashmir (Extension of Laws) Act, 1956, as the case may be, entitling him to act as an auditor of companies in the territories which, immediately before the 1st November, 1956, were comprised in that State or any portion thereof, shall be entitled to be appointed to act as an auditor of companies registered anywhere in India.

(b) The Central Government may, by notification, make rules providing for the grant, renewal, suspension or cancellation of auditors' certificates to persons in the territories which, immediately before the 1st November, 1956, were comprised in Part B States for the purposes of clause (a), and prescribing conditions and restrictions for such grant, renewal, suspension or cancellation.

(3) None of the following persons shall be qualified for appointment as auditor of a company-

(a) a body corporate;

(b) an officer or employee of the company;

(d) a person who is indebted to the company for an amount exceeding ten thousand rupees, or who has given any guarantee or provided any security in connection with the indebtedness of any third person to the company for an amount exceeding ten thousand rupees;

(e) a relative of -

(i) a director or manager of the company;

(ii) a person holding share exceeding five per cent of the paid-up share capital or shares exceeding the value of five lakh rupees of the company, whichever is less.

Provided that any securities held by such person as nominee or trustee for any third person and in which the holder has no beneficial interest shall be excluded in computing the percentage of securities held by him for the purpose of this clause.

Explanation.-References in this sub-section to an officer or employee shall be construed as not including references to an auditor.

(4) A person shall also not be qualified for appointment as auditor of a company if he is, by virtue of sub-section (3), disqualified for appointment as auditor of any other body corporate which is that company's subsidiary or holding company or a subsidiary of that company's holding company, or would be so disqualified if the body corporate were a company.

(5) If an auditor becomes subject, after his appointment, to any of the disqualifications specified in sub-sections (3) and (4), he shall be deemed to have vacated his office as such.

186 Powers and duties of auditors.-

(1) Every auditor of a company shall have a right of access at all times to the books and accounts and vouchers of the company, whether kept at the head office of the company or elsewhere and shall be entitled to require from the officers of the company such information and explanations as the auditor may think necessary for the performance of his duties as auditor.

(2) Without prejudice to the provisions of sub-section (1), the auditor shall inquire-

(a) whether loans and advances made by the company on the basis of security have been properly secured and whether the terms on which they have been made are not prejudicial to the interests of the company or its members;

(b) where transactions of the company which are represented merely by book entries are not prejudicial to the interests of the company;

(c) where the company is not an investment company within the meaning of section 257 or a banking company, whether so much of the assets of the company as consist of securities, debentures and other securities have been sold at a price less than that at which they were purchased by the company;

(d) whether on the basis of information and explanations obtained by the auditor under sub-section (1) he has any comments to offer on loans and advances made by the company have been shown as deposits;

(e) whether personal expenses have been charged to revenue account;

(f) where it is stated in the books and papers of the company that any securities have been allotted for cash, whether cash has actually been received in respect of such allotment, and if no cash has actually been so received, whether the position as stated in the account books and the balance sheet is correct, regular and not misleading.

(3) The auditor shall make a report to the members of the company on the accounts examined by him, and on every balance sheet and profit and loss account and on every other document declared by this Act to be part of or annexed to the balance sheet or profit and loss account, which are laid before the company in general meeting during his tenure of office, and the report shall state whether, in his opinion and to the best of his information and according to the explanations given to him, the said accounts give the information required by this Act in the manner so required and give a true and fair view-

(i) in the case of the balance sheet, of the state of the company's affairs as at the end of its financial year; and

(ii) in the case of the profit and loss account, of the profit or loss for its financial year.

(4) The auditor's report shall also state-

(a) whether he has obtained all the information and explanations which to the best of his knowledge and belief were necessary for the purposes of his audit;

(b) whether, in his opinion, proper books of account as required by law have been kept by the company so far as appears from his examination of those books, and proper returns adequate for the purposes of his audit have been received from branches not visited by him;

(c) whether the report on the accounts of any branch office audited under section 187 by a person other than the company's auditor has been forwarded to him as required by clause (c) of sub-section (3) of that section and how he has dealt with the same in preparing the auditor's report;

(d) whether the company's balance sheet and profit and loss account dealt with by the report are in agreement with the books of account and returns.

(e) whether in his opinion, -

(i) accounting policies of the company are in conformity with the accounting standards,

(ii) there have been any deviation from the company's accounting policies; and if so, the quantum of financial implications such deviations have caused

(iii)the accounting treatment in the balance sheet and the profit and loss account in respect of any item is inappropriate.

(5) Where any of the matters referred to in clauses (i) and (ii) of sub-section (3) or in clauses (a), (b), (c), (d) and (e) of sub-section (4) is answered in the negative or with a qualification, the auditor's report shall state the reason for the answer.

(6) The Central Government may, by general or special order, direct that, in the case of such class or description of companies as may be specified in the order, the auditor's report shall also include a statement on such matters as may be specified therein:

Provided that before making any such order the Central Government may consult the Institute of Chartered Accountants of India constituted under the Chartered Accountants Act, 1949 (38 of 1949) in regard to the class or description of companies and other ancillary matters proposed to be specified therein unless the Government decides that such consultation is not necessary or expedient in the circumstances of the case.

(7) The accounts of a company shall not be deemed as not having been, and the auditor's report shall not state that those accounts have not been, properly drawn up on the ground merely that the company has not disclosed certain matters if-

(a) those matters are such as the company is not required to disclose by virtue of any provisions contained in this or any other Act, and

(b) those provisions are specified in the balance sheet and profit and loss account of the company.

187 Audit of accounts of branch office of company –

(1) Where a company has a branch office, the accounts of that office shall, be audited by the company's auditor appointed under section 183 or by a person qualified for appointment as auditor of the company under section 185, or where the branch office is situate in a country outside India, either by the company's auditor or a person qualified as aforesaid or by an accountant duly qualified to act as an auditor of the accounts of the branch office in accordance with the laws of that country.

(2) Where the accounts of any branch office are audited by a person other than the company's auditor the company's auditor-

(a) shall be entitled to visit the branch office, if he deems it necessary to do so for the performance of his duties as auditor, and

(b) shall have a right of access at all times to the books and accounts and vouchers of the company maintained at the branch office:

(3)(a) Where a company in general meeting decides to have the accounts of a branch office audited otherwise than by the company's auditor, the company in that meeting shall for the audit of those accounts appoint a person qualified for appointment as auditor of the company under section 185, or where the branch office is situate in a country outside India, a person who is either qualified as aforesaid or an accountant duly qualified to act as an auditor of the accounts of the branch office in accordance with the laws of the country, or authorise the Board of directors to appoint such a person in consultation with the company's auditor

(b) the person so appointed (hereafter in this section referred to as the branch auditor) shall have the same powers and duties in respect of audit of the accounts of the branch office as the company's auditor has in respect of the same;

(c) the branch auditor shall prepare a report on the accounts of the branch office examined by him and forward the same to the company's auditor who shall in preparing the auditor's report, deal with the same in such manner as he considers necessary;

(d) the branch auditor shall receive such remuneration and shall hold his appointment subject to such terms and conditions as may be fixed either by the company in general meeting or by the Board of directors if so authorised by the company in general meeting.

188. Signature of audit report, etc. –

Only the person appointed as an auditor of the company, or where a firm is so appointed in pursuance of the proviso to sub-section(1) of section 185, only a partner of the firm practising in India, may sign the auditor's report, or sign or authenticate any other document of the company required by law to be signed or authenticated by the auditor.

189 Reading and inspection of auditor's report and auditor's right to attend annual general meeting.-

(1) The auditor's report shall be read before the company in general meeting and shall be open to inspection by any member of the company.

(2) All notices of, and other communications relating to, any general meeting of a company which any member of the company is entitled to have sent to him shall also be forwarded to the auditor of the company; and the auditor shall be entitled to attend any general meeting and to be heard at any general meeting which he attends on any part of the business which concerns him as auditor.

190 Penalty for non-compliance with certain sections.-

If default is made by a company in complying with any of the provisions contained in section 184, 185, 187 and 189 the company, and every officer of the company who is in default, shall be punishable with fine which may extend to five thousand rupees.

191. Penalty for non-compliance by auditor with sections 186 and 188.-

If any auditor's report is made, or any document of the company is signed or authenticated, otherwise than in conformity with the requirements of sections 186 and 188, the auditor concerned, and the person, if any, other than the auditor who signs the report or signs or authenticates the document, shall, if the default is wilful, be punishable with fine which may extend to ten thousand rupee