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Journalism of Courage
In keeping with the recommendations of the Naresh Chandra Committee to improve corporate auditing standards and corporate governance, the Department of Company Affairs (DCA) under the finance ministry has proposed stiff penalties for auditors carrying out certain non-audit services. The department has also proposed that the central government be given the power to attach, with the approval of a magistrate, bank accounts of a company or companies or their directors if it has reasonable grounds to believe that ill-gotten gains are deposited therein. This is in keeping with the recent powers which have been provided to market regulator Sebi under Section 11(4)(e) of the Sebi Act.
The DCA has proposed to add a new section 226A under the Companies Act which would ensure that the statutory auditors, or its associates or subsidiaries or affiliated entities, as may be defined by the central government, should not provide to the company to which it is the auditor, such services as may be prescribed by the government.
In an effort to give teeth to this new section, the department has also proposed stiff penalties for officers, auditors and companies who would violate the section. It has been proposed that section 233 of the Companies Act should also be amended and the penalty, which is only Rs 10,000, be also rationalised. The proposed penalty for officers in default would be Rs 500 for each day of default. For the companies it would be up to 25 per cent of the company’s paid-up capital and free reserves subject to a maximum of Rs 1 crore. For auditors the penalty would be three times of the total remuneration received by the audit firm, or affiliates or associates, as may be prescribed, subject to a minimum of Rs 50,000.
The Committee had also recommended that financial, business, employment or personal relationships, or over-dependence on a single client, should disqualify auditors/audit firms, or their associates or subsidiaries or affiliated entities, as may be defined by the central government, from being appointed as auditors of a company. Though a sub-section of section 226 gives the existing disqualifications, it has been proposed by the department that the government may prescribe such conditions that will disqualify persons from being appointed as auditors to the firm.
The DCA has also proposed to incorporate the definition of ‘independent directors’, as laid down in the report, in the amended Companies Act. A proviso may also be added in the section 292A(1) which would ensure that the government may prescribe that audit committees consists only of independent directors in companies having a paid-up capital or turn-over as may be prescribed. Amendments would also provide for pre-certification by company secretaries and would also give the government the power to order compliance audit.
