Like standard like law: Section 143(3)(i) of the Companies Act 2013

CaseWare IndiaAuditing

The new Companies Act 2013 (here in after referred to as the act) was passed with a real bang and created terror for so many companies and in the minds of professionals in general. The new framework of law and rules decided to take severe actions for offences committed under the act. To reflect on one of the biggest corporate scam, India Inc. has ever seen, the Satyam episode, the lawmaker is said to be justified in choosing those extreme penal actions.

The confessions made by Ramalinga Raju (the former CEO of Satyam) shook the Indian economy. It made the regulators and the corporates realise there were serious gaps in the regulatory standards at that point of time. Efficiency of Indian corporate governance standards, role of auditors, lack of supervision by regulatory bodies, …it was all chaos. Revenue was fraudulently recognised over the years in the books and the debit went to a supposedly illusionary cash /and bank balance (though people still argue that he stole the money and claiming it to be a financial reporting fraud was easier for him). To a common investor this can feel like a big hit to his common sense! A person can just simply cook the books for years without the learned professionals and regulatory bodies never finding it!

According to Mr Dr Devdutt Patnaik, the chief belief officer for Future group, history always repeats owing to the limited capacity of human mind. As was rightly pointed out by those words, Enron scam which happened in the United States followed the same rule of cooking the books. WorldCom, Lehman brothers, Parmalat… the list can go on and on. At this juncture it is wise to recap the auditing pronouncements and guidance. The auditing standards always insisted on the presumption that there is always risks of fraud in revenue recognition which the auditor can at a later stage rebut with the support of appropriate audit evidence.

Section 143(3)(i) of the act requires the statutory auditors of the companies to report as whether the company has adequate internal financial controls system in place and the operating effectiveness of such controls. This boils down to the auditing standard on risk assessment (SA 315). The said provision in the act has now made it a statutory rather than a professional responsibility on the auditors to report about the design and operating effectiveness of internal financial controls. In short, for the audit professionals it is not a novel concept. It is just that a reporting duty is cast on them. The section takes effect from 01/04/2015 and it means the same is applicable for audits relating to FY 15-16. The ICAI has issued a guidance note on the subject on 14/09/2015 (please visit the ICAI website for more details).