Scrutiny of Compliance with Accounting Standards by Registrar of Companies

Rutuja Umadikar & Isha Jain – [2024] 164 taxmann.com 296 (Article)

1. Introduction

Section 133 of the Companies Act 2013 (‘the Act’) authorises the Ministry of Corporate Affairs (‘MCA’) in consultation with National Financial Reporting Authority (‘NFRA’) to prescribe the accounting standards to be followed by companies while preparing the financial statements. Accordingly, MCA had notified accounting standards prescribed by the Institute of Chartered Accountants of India (‘ICAI’)on 7th December 2009and the same has been continued under the Act as well.Because the accounting standards relate to true and fair disclosure of financial statements, compliance with the same has great importance in the eyes of all the regulators.

The requirement of complying with accounting standards while preparing financial statements comes from section 129 of the Act. Therefore, a consequence of non-compliance with the same also originates from the Act itself.

Section 129 of the Act provides for compounding of offence in case of non-compliance. Hence, non-compliance with accounting standards does not fall under the adjudication mechanism. However, non-disclosure of violation of accounting standards adjudicates offence under sections like section 134 or section 143, etc.

From the scrutiny of recent ROC orders, it is observed that the ROC has been highlighting and penalizingnon-disclosure of non-compliance with accounting standards while preparing financial statements. In this article, we shall try to analyze8 ROC orders in the context of non-disclosure of violation of accounting standards and try to understand what caution is required to be taken by officers of the company in this regard.

2. Analysis of ROC orders

If we study the adjudication orders passed by ROCs in the last 6months, we may observe that, ROC has penalizedthe directors and auditors of the company for not disclosing the violation of accounting standards in the director’s responsibility statement (DRS) in the board report and in the auditor’s report as the case may be. The penalties have been levied under sections 134 and 143 respectively.

The orders are broadly classified under both these sections based on the person on whom the penalty is imposed. Wherever AS has been violated by the company and the statutory auditors have not commented on the same, the penalty under section 143 has been imposed on the auditor and wherever the directors have not reported about non-compliance of AS in the DRS under the director’s report, then the directors of the company are penalized for not giving true and fair disclosure in the financial statements.

Click Here To Read The Full Article