Errant cos auditors will also face the music now

The corporate affairs ministry has decided to take to task auditors too besides the top management in companies that violate Section 211 of the Companies Act.

The corporate affairs ministry has decided to take to task auditors too besides the top management in companies that violate Section 211 of the Companies Act. Section 211 relates to the form and content of balance sheet and profit and loss statements of companies. Sources in the ministry said auditors in about 30-35 companies had been called in the recent past for clarification.

According to the Act,balance sheets must give a true and fair view of the state of affairs of companies as at the end of the financial year and,subject to the provisions of the section,be in the form set out in Part I of Schedule VI. The Centre,however,has the power to exempt companies from compliance with any of the requirement in Schedule VI in public interest.

So far,the practice has been to call only directors of companies found violating the section. But,post-Satyam,the ministry has started questioning auditors as well. They are being questioned about deviations and the reason for not qualifying such deviations.

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Either they should write about the deviations or should at least qualify these. They do neither. It is not just the management’s responsibility. Auditors are equally responsible, a source said.

Under Section 227 of the Companies Act,auditors are required to,among other things,inquire (a) if the loans and advances made by the company on the basis of security have been properly secured,(b) whether transactions represented merely by book entries are not prejudicial to the interests of the company,(c) whether personal expenses have been charged to revenue account and accounts give a true and fair view among various other responsibilities.

Deviations from any of the responsibilities in the Act will put the auditor under scanner,the source added. In the Satyam scam,auditors,currently facing prosecution,were aware of the audit system failure but turned a blind eye,ministry sources noted.