What is the Role of Accounts and Audit in Business Growth and Success?

Table of Contents

ACCOUNTS

1. Books of account required to be kept

2. Inspection of books of account

3. Persons responsible for keeping proper books of account [vide sub-section (6) of section 128]

4. Financial Statements

5. Authentication of Accounts

6. Board’s Report

7. Circulation of Financial Statements

8. Adoption and filing of Financial Statements

9. Accounting Standards

10. Internal Audit

AUDIT

11. Who can be appointed as an Auditor (Qualifications)?

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ACCOUNTS

1 . Books of account required to be kept¹

Section 128 of the Companies Act, 2013 requires every company to maintain at its registered office books of account and other relevant books and papers and financial statements for every financial year which give a true and fair view of the state of affair of the company including that of its branch office or offices. As per Section 2(13) the books of account includes records maintained with respect to:

(a) all sums of money received and expended by the company and the matters in respect of which receipts and expenditure take place;

(b) all sales and purchases of goods by the company;

(c) the assets and liabilities of the company; and

(d) the items of cost as may be prescribed under section 148 in the case of a company which belongs to any class of companies specified under that section;

As noted in the preceding paragraph, Section 128 requires books of account to be kept at the registered office of the company. However, the proviso to Section 128(1) allows the company to keep its books of account or any of them at any other place in India as the Board of directors may decide. In such a case, the company is required to file with the Registrar a notice in writing giving the full address of that other place within seven days. In respect of a branch office in India or outside India, Section 128 (2) allows the books of account relating to the transactions effected at the branch office to be kept at that office. However proper summarized returns periodically are required to be sent by the branch office to the company at its registered office or the other place referred to in Section 128(1).

The proviso to Section 128(1) also permits the company to maintain the books of account and other relevant papers in an electronic mode. If the books of account are maintained in the electronic mode, the Rule 3 of the Companies (Accounts) Rules, 2014 requires that such books of account and records to remain accessible in India, at all times for being usable subsequently. Such books and records must be maintained in the format in which they were originally generated, sent or received. Likewise the information received from the branch office need to be kept without alternation and must depict information originally received from the branches. The company needs to have proper system of storage, retrieval, display or printout as considered appropriate by the Audit Committee or the Board. In respect of books and records maintained in the electronic form including at a place outside India, daily back up shall be kept in servers physically located in India. If the company is using the services of a third party service provider for maintaining the books and records in the electronic format, company shall intimate to the Registrar the name of the service provider, internet protocol address and location of the service provider. If the service provider is located outside India, the name and address of the person in control of the books of account and other books and papers in India also needs to be intimated. This information needs to be furnished annually at the time of filing of the financial statements.

With effect from the financial year commencing on or after April 2021, the accounting software used by the company to maintain the books of account must have the features of recording audit trail of each transaction and creating an edit log of each change made in the books of account alongwith the dates when such changes were made. Moreover, the software must not permit disabling of the audit trail.* The accounting software need to keep audit trail, log of all changes made and not permit disabling of the audit trail.

Section 338(2) provides (taken in positive terms) that proper books of account constitute such books of account as are necessary to exhibit and explain the transactions and financial position of the business of the company, including books containing sufficiently detailed entries of daily cash receipts and payments. Also, where the business of the company has involved dealings in goods, statements of the annual stock takings (except in the case of goods sold by way of ordinary retail trade) and of all goods sold and purchased, showing the goods and the buyers and sellers thereof in sufficient detail to enable these goods and these buyers and sellers to be identified should also be maintained. Though section 338 relates to a situation involving winding up of a company, it has the special effect of further amplifying the requirements as regards maintenance of books of account and should be taken as a general requirement from the standpoint of the company. In other words, its application should not be taken as confined to winding-up process only.

Proper books of account

Section 2 (13) and Section 128(1) read with section 338(2) of the Act provides for the maintenance of proper books of account and they obviously include the cost accounting records [section 2(13)(d)] and stock records [section 338(2)], apart from normal books of account. As per Section 148(1) of the Act the Central Government may order that companies engaged in production of such goods or providing such services as may be prescribed to maintain detailed cost records including utilization of material or labour or other items of cost in the manner specified by the Central Government. The Central Government had ordered maintenance of Cost Records for different types of Industries. Proper maintenance of stock records is also a necessity as in the absence of proper stock record the true and fairness of the annual statements of account cannot be properly understood. The Institute of Chartered Accountants of India (ICAI) had in the Compendium of Guidance Notes² , casts the duty on the statutory auditor to examine the cost records maintained, as the cost records form a part of the “proper books of account” within the meaning the Act.

2. Inspection of books of account³

Section 128(3) provides that books of account and other books and papers shall be open to inspection by any director during business hours. However inspection in respect of the subsidiary company is permitted only by a person duly authorized by the Board of Directors by passing a resolution in this regard.

Further, section 206(1) provides that the Registrar by a written notice may call on the company to produce the books of account, books, papers and explanations as may be required. Before serving any notice under Section 206, the Registrar shall record his reasons in writing for issuing such notice. Likewise, if the circumstances so warrant, the Central Government under section 206(5) of the Act may appoint an inspector for carrying out an inspection of books and papers of a company. If the Registrar or inspector so appointed by the Central Government calls for the books of account and other books and papers as aforesaid, the directors, officers and employees of the company are duty bound to produce all such documents and other statements, information and explanations as may be needed for the purpose of such inspection. The Registrar or inspector making the inspection under section 206, may make or cause to be made copies of books and account and other books and papers or place or cause to be placed any marks of identification on the books of account or other books and papers as token of inspection having been made.

Penalty under section 207(4)

Sub-section (1) of section 207 casts a duty on every director or other officer or employee of the company to produce to the person making inspection all such books of account and other books and papers of the company in his custody/control and to furnish him with any statement, information or explanation as may be required by that person, within such time and at such place as he may specify. Also, it is the duty of every director, other officer or employee of the company to assist the person in the inspection as it may be reasonable to expect from the company. Where default has been made in the above matter, every officer of the company, including a director who is in default, shall be punishable with fine which shall not be less than rupees twenty five thousand but which may extend to rupees one lakh and also with imprisonment for a term which may extend to one year. Further, the director or the officer, if convicted, shall, on and from the date of conviction, be deemed to have vacated his office as such and also shall be disqualified for holding such office in any company. In respect of directors, this vacation of office is in addition to the grounds mentioned in section 167 of the Act. This disqualification extends to private companies as well.

3. Persons responsible for keeping proper books of account [vide sub-section (6) of section 128]

The managing director, the whole-time director in charge of finance, the Chief Financial Officer or any other person of a company who has been given the responsibility of keeping proper books of account and other matters enumerated under section 128 shall be held responsible for keeping proper books of account.

Punishment for default

In case of contravention, the person so responsible shall be punishable with fine which shall not be less than rupees fifty thousand and may extend to rupees five lakhs.* There is no provision in the Act to prosecute the company concerned. Only the functionaries identified in these sections who alone can be charged and prosecuted – Sanjay Suri v. State [2010] 102 SCL 1 (Delhi).

Proper books of account in relation to the branch of a company

Section 128(2) states that where a company has a branch office, whether in or outside India, the company shall be deemed to have complied with the provisions of section 128(1), if proper books of account relating to the transactions effected at the branch office are kept at that office and proper summarised returns, made up to date, at intervals of not more than three months, are sent by the branch office to the registered office of the company or at such other address where the books of account are kept by fulfilling the requirements mentioned earlier. This requirement is specific that a foreign branch has also to maintain proper books of account as required by section 128(1) of the Act, irrespective of the requirement, if any, in the country where the branch is located.

Period for which books of account to be retained

Section 128(5) specifies that the books of account of every company relating to the period of not less than eight years immediately preceding the current year shall be preserved in good order along with the relevant vouchers. Where a company has not been in existence for eight years, the books of account and related vouchers should be preserved in good order right from the first accounting year of the company.

4. Financial Statements

The Section 129 (1) of the Act requires every company to prepare its financial statements at the end of ‘financial year’ so as to give a true and fair view of the state of affairs of the company. Such statements shall comply with the accounting standards notified under section 133 of the Act in the format prescribed in Schedule III. Section 2(40) of the Act has given an inclusive definition of the expression ‘financial statements’. The financial statements accordingly include —

(i) a balance sheet as at the end of the financial year;

(ii) a profit and loss account,

(iii) cash flow statement for the financial year;

(iv) a statement of changes in equity, if applicable; and

(v) any explanatory note annexed to, or forming part of, any document referred to in sub-clause

In case of company not carrying on business for profit, it will prepare ‘Income & Expenditure Account’ instead of Profit and Loss account. With respect to One Person Company, small company and dormant company, the cash flow statement need not be prepared.

The financial statement for the financial year are required to be presented by the Board of Directors before the annual general meeting (AGM) of members [Section 129(2)]. As the AGM is required to take place within six months of close of the financial year under Section 96(1), it means that the financial statements must be ready within six months of the close of the financial year.

The financial statements are required to be prepared for each financial year. Section 2(41) of the Act defines the ‘financial year’ in relation to a company as the period ending on the 31st day of March every year. In case of a new company incorporated on or after 1st day of January of a year, the financial year will end on the 31st day of March of the following year. The Act provides for a uniform financial year ending on 31st day of March. The first financial year of a company may be shorter or longer than 12 months. The first financial year for a company incorporated between 1st January and 31st March would be longer than 12 months whereas for other companies it would be shorter than 12 months.

A company which is either a holding or a subsidiary of a company incorporated outside India and which is required to follow a different financial year for consolidation of its accounts may follow a different period as financial year. For this purpose the application needs to be made to the Central Government. Prior to the Companies (Amendment) Act, 2019, the application was to be made to the Tribunal.

Prior to the commencement of the Act, many companies were following accounting period different than that ending on 31st March. Such companies have been permitted a period of two years from the commencement of the Act to align their financial year as prescribed by the Act [proviso to Section 2(41)]. During this period of alignment such companies would have at least one financial year which is either longer or shorter than twelve months.

The Income-tax Act, 1961 already requires that all companies must submit their income-tax returns on the basis of ‘Uniform Financial Year’ closing on 31st March every year. A uniform financial year under the companies act would obviate the need for maintaining separate accounts for income-tax purposes.

4.1 Preparation and presentation of financial statements

Section 129 along with Schedule III* to the Act deals with the preparation and presentation of balance-sheet and the statement of profit and loss of a company. This section requires that the financial statements shall give a true and fair view of the state of affairs of the company. The balance sheet should be in the form set out in Part I of Schedule III and the statement of profit and loss should be in form set out in Part II of Schedule III. Any reference to the financial statement under this section shall include any notes annexed to or forming part of such financial statement, giving information required to be given and allowed to be given in the form of such notes under this Act (Explanation to Section 129).

Schedule III* of the Act prescribes the form in which the balance sheet, the statement of profit and loss and consolidated financial statements should be prepared. Schedule III have been divided into two parts. Division-I contains the formats of financial statements and general instructions for preparation of financial statements for companies which are required to comply with the existing accounting standards. Division II prescribes the formats and general instructions for preparation of financial statements for companies which are required to comply with the revised Indian Accounting Standards (Ind AS) compliant with the International Financial Reporting Standards (see para 19.9-1).

The balance sheet and the statement of profit and loss of a company shall not be treated as not disclosing a true and fair view of the state of affairs of the company, merely by reason of the fact that they do not disclose—

(i) in the case of an insurance company, any matters which are not required to be disclosed by the Insurance Act, 1938 or the Insurance Regulatory and Development Authority Act, 1999;

(ii) in the case of a banking company, any matters which are not required to be disclosed by the Banking Companies Act, 1949;

(iii) in the case of a company engaged in the generation or supply of electricity, any matters which are not required to be disclosed under the Electricity Act, 2003;

(iv) in the case of a company governed by any other law for the time being in force, any matters which are not required to be disclosed by that special law. [proviso to Section 129(1)].

The above provisions are not applicable to an insurance or banking company or any company engaged in the generation or supply of electricity or any other class of companies for which a form of financial statements has been specified in or under the special law concurrently governing such company.

Exemption from requirements of Schedule III

The Central Government may, by notification exempt in public interest, any class or classes of companies from compliance with any of the requirements of Section 129. Any such exemption may be granted either unconditionally or subject to such conditions as may be specified in the notification [Section 129(6)]. Such an exemption may be given the Central Government on its own or on an application made by a class or classes of companies.

Compliance with Accounting Standards

 As per section 129(1) of the Act, items contained in the financial statements shall comply with the accounting standards notified under section 133. In respect of a government company engaged in defence production, Accounting Standard 17 (Segment Reporting) will not apply.** Where the financial statements of a company do not comply with the accounting standards, such company shall disclose in its financial statements the following :—

(a) the deviation from the accounting standards;

(b) the reasons for such deviation; and

(c) the financial effect, if any, arising due to such deviation [Section 129(5)]. Additionally the Directors’ Responsibility Statement prepared under Section 134 of the Act shall state that the applicable accounting standards had been followed in the preparation of the financial statements giving proper explanation in case of material departures.

Until the accounting standards are notified by the Central Government under section 133 as aforesaid, the standards specified under the Companies Act, 1956 shall apply as the accounting standards.

Responsibility for compliance

 The managing director, the whole-time director in charge of finance, the Chief Financial Officer or any other person charged by the Board with the duty of complying with the requirements of this section and in the absence of any of the officers mentioned above, all the directors are deemed to be responsible for the compliance with the provisions of Section 129. As per Section 129(7) in case of contravention, those responsible shall be punishable with impri-sonment for a term which may extend to one year or with fine which shall not be less than rupees fifty thousand but which may extend to rupees five lakh, or with both.

Preparation of consolidated financial statements by the holding company*

Section 129(3) of the Act requires that where there is one or more subsidiary or associate companies of a company (i.e., the holding company), at the end of the financial year of the (holding) company, it shall prepare a consolidated financial statement of the company and of all the subsidiaries and associate companies. The consolidated financial statements shall be presented in the same form and manner as that of its own. The consolidated financial statements are also required to be laid before the annual general meeting of the company. In addition, a separate statement containing the salient features of the financial statement of the subsidiary or subsidiaries and associate companies shall also be presented.

4.2 Periodical Financial Results by Unlisted Companies

It may be noted that the listed companies are required to prepare and disseminate quarterly results in terms of the listing agreement with the stock exchange. There was no such requirement for unlisted companies. Section 129A, inserted vide the Companies (Amendment) Act, 2020, the Central Government is empowered to require such class or classes of unlisted companies to prepare the financial results periodically. The form and periodicity for preparing the periodic financial results as may be prescribed. The periodical results may also be subject to complete audit or limited review and would be approved by the Board of Directors. A copy of the periodical results needs to be filed with the Registrar within thirty days of completion of the relevant period.†

5. Authentication of Accounts

According to section 134(1), the financial statements of a company, including the consolidated financial statements, shall be approved by the Board of Directors. They are required to be signed on behalf of the Board of directors by the chairperson of the company where he is authorized by the Board or by two directors out of which one shall be the managing director and the Chief Executive Officer, if he is a director of the company. They are also required to be signed by the Chief Financial Officer and the company secretary of the company if appointed. In case of a banking company, the balance sheet and the profit and loss account shall be signed by the persons mentioned in clause

(a) or clause

(b) of section 29(2) of the Banking Regulation Act, 1949. In the case of One Person Company, they are required to be signed by only one director.

The financial statements of all companies shall be approved by the Board of directors before they are signed on behalf of the Board in accordance with the provisions of this section and before they are submitted to the auditors for their report thereon. Section 134 (2) further provides that auditors’ report shall be attached to every financial statement.

6. Board’s Report

Section 134(3) requires that there shall be attached to financial statements laid before a company in general meeting, a report by its Board of directors, with respect to the following:

(a) the web address, if any, where annual return referred to in sub-section (3) of section 92 has been placed;*

(b) number of meetings of the Board;

(c) Directors’ Responsibility Statement;

(d) details in respect of frauds reported by auditors under sub-section (12) of section 143 other than those which are reportable to the Central Government.⁴

(e) a statement on declaration given by independent directors under sub-section (6) of section 149;

(f) in case of a company covered under sub-section (1) of section 178, company’s policy on directors’ appointment and remuneration including criteria for determining qualifications, positive attributes, independence of a director and other matters provided under sub-section (3) of section 178**;

(g) explanations or comments by the Board on every qualification, reservation or adverse remark or disclaimer made—

(i) by the auditor in his report; and

(ii) by the company secretary in practice in his secretarial audit report;

(g) particulars of loans, guarantees or investments under section 186;

(h) particulars of contracts or arrangements with related parties referred to in sub-section (1) of section 188 in the prescribed form;

(i) the state of the company’s affairs;

(j) the amounts, if any, which it proposes to carry to any reserves;

(k) the amount, if any, which it recommends should be paid by way of dividend;

(l) material changes and commitments, if any, affecting the financial position of the company which have occurred between the end of the financial year of the company to which the financial statements relate and the date of the report;

(m) the conservation of energy, technology absorption, foreign exchange earnings and outgo, in such manner as may be prescribed;

(n) a statement indicating development and implementation of a risk management policy for the company including identification therein of elements of risk, if any, which in the opinion of the Board may threaten the existence of the company;

(o) the details about the policy developed and implemented by the company on corporate social responsibility initiatives taken during the year;

(p) in case of a listed company and every other public company having such paid-up share capital as may be prescribed, a statement indicating the manner in which formal #annual evaluation of the performance of the Board, its Committees and of individual directors has been made*;

(q) such other matters as may be prescribed.

If the disclosure as required under section 134(3) has been made elsewhere in the financial statements, it would be sufficient to refer to such disclosure rather than repeating the same in the Board’s report. In case, the policies referred to in sub-clause (e) or (o) are available on the company’s website, only salient features and changes in the policy need to be mentioned in the Board’s report indicating the web-address where such policies are available. In case of One Person Company or small company, the Central Government may prescribe an abridged Boards’ report †

The Board’s Report shall be prepared using the financial statements of the company on a standalone basis. The performance and financial position of each of the subsidiaries, joint ventures companies and associates included in the consolidated financial statement shall be reported separately in the Board’s Report.

6.1 Directors’ Responsibility Statement

Clause (c) of Section 134(3) requires a Directors’ Responsibility Statement to be furnished as a part of the Directors’ Report. It reinforces the responsibility of the Board in laying down the internal controls, maintenance of accounting records and preparation of financial statements. The Directors’ Responsibility Statement accordingly states:

(a) Applicable accounting standards have been followed in the preparation of financial statements. In case of a deviation, proper explanation has been provided.

(b) Accounting policies have been selected by the Board and judgments and estimates have been made that are reasonable and prudent. The policies chosen have been applied consistently. The financial statements give a true and fair view of the state of affair of the company at the end of the financial year and the profit and loss of the company for that period.

(c) Proper and sufficient care has been taken for the maintenance of adequate accounting records to meet the requirements of the Act. The directors also take responsibility for safeguarding the assets of the company and for preventing and detecting frauds and other irregularities.

(d) The accounts have been prepared on a going concern basis.

(e) In the case of a listed company, adequate internal financial controls have been laid down and such controls are operating effectively.

(f) Proper systems have been laid down to ensure compliance with the provisions of all the applicable laws.

6.2 Additional information under the Companies (Accounts) Rules, 2014

Rule 8(5) requires some additional information to be reported in the Board’ report as detailed below:

(i) the financial summary or highlights;

(ii) the change in the nature of business, if any;

(iii) the details of directors or key managerial personnel who were appointed or have resigned during the year;

(iii) a statement regarding opinion of the Board with regard to integrity, expertise and experience (including the proficiency) of the independent directors appointed during the year. For this purpose, the expression “proficiency” is ascertained from the online proficiency self-assessment test conducted by the institute notified under sub-section (1) of section 150*.

(iv) the names of companies which have become or ceased to be its Subsidiaries, joint ventures or associate companies during the year;

(v) the details relating to deposits accepted during the year, remained unpaid or unclaimed as at the end of the year. If there has been any default in repayment of deposits or payment of interest thereon during the year and if so, number of such cases and the total amount involved;

(vi) Deposits which are not in compliance with the requirements of the Act need to be reported separately;

(vii) Any significant and material orders passed by the regulators or courts or tribunals impacting the going concern status and company’s operations in future;

(viii) Adequacy of internal financial controls with reference to the Financial Statements;

(ix) a disclosure, as to whether maintenance of cost records as specified by the Central Government under sub-section (1) of section 148 of the Companies Act, 2013, is required by the Company and accordingly such accounts and records are made and maintained;

(x) a statement that the company has complied with provisions relating to the constitution of Internal Complaints Committee under the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013 [14 of 2013]**.

(xi) the details of applications made or any proceedings pending under the Insolvency and Bankruptcy Code, 2016 during the year alogwith their status at the end of the financial year;

(xii) the details of difference between amount of valuation done at the time of one time settlement and the valuation done while taking loan from the banks or financial institutions alongwith reasons thereof.

6.3 Board Report for One Person Company and Small Company

The Board’s Report of One Person Company and Small Company is required to be prepared based on the standalone financial statement of the company, which shall be in abridged form and contain the following:-

(a) the web address, if any, where annual return referred to in sub-section (3) of section 92 has been placed;

(b) number of meetings of the Board;

(c) Directors’ Responsibility Statement as referred to in sub-section (5) of section 134;

(d) details in respect of frauds reported by auditors under sub-section (12) of section 143 other than those which are reportable to the Central Government;

(e) explanations or comments by the Board on every qualification, reservation or adverse remark or disclaimer made by the auditor in his report;

(f) the state of the company’s affairs;

(g) the financial summary or highlights;

(h) material changes from the date of closure of the financial year in the nature of business and their effect on the financial position of the company;

(i) the details of directors who were appointed or have resigned during the year;

(j) the details or significant and material orders passed by the regulators or courts or tribunals impacting the going concern status and company’s operations in future.

The Report of the Board shall contain the particulars of contracts or arrangements with related parties referred to in sub-section (1) of section 188 in the Form AOC-2*.

6.4 Corporate Social Responsibility Report

Section 135 of the Act requires certain companies to constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors with atleast one independent director. However, if a company is not required to appoint an independent director under section 149(4), the CSR committee shall have two or more directors**. The companies specified for this purpose are those having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more. The composition of the committee formed under Section 135 needs to be disclosed in the Board’s report. Clause (o) of Section 134(3) requires disclosure of company’s policy and initiatives taken during the year. The Companies (Social Responsibility Policy) Rules, 2014 states that Board’ report shall include an annual report on CSR containing particulars specified in the Annexure to the rules. In addition, every company to which section 135(1) applies is required to furnish a report on Corporate Social Responsibility to the Registrar in the prescribed form for the preceding year 2020-21 onwards.*

6.5 Composition of Audit Committee

Every listed company and other class or classes of companies as may be specified are required to constitute an Audit Committee as per the requirements of Section 177(1). The Audit Committee so constituted has power to give recommendation to the Board on matters relating to appointment of auditors, internal financial controls etc. The Board’s report needs to disclose the composition of Audit Committee. If any of the recommendation of the Audit Committee had not been accepted by the Board, the same also shall be disclosed in the Board’s Report [Section 177(8)].

6.6 Report to be signed by the Chairman of the Board

The Board’s report and any annexures thereto shall be signed by the chairperson of the company if he is authorised in that behalf by the Board; and where he is not so authorised, the report shall be signed by at least two directors one of whom shall be a managing director or by the director where there is one director [Section 134(6)].

Any contravention to the provisions of Section 134 makes both the company and officers of the company at default liable to punishment. The company shall be liable to a penalty of rupees three lakhs and every officer of the company who is in default shall be liable to a penalty of rupees fifty thousand.† [Section 134(8)]

7. Circulation of Financial Statements

Section 134(7) requires that a signed copy of every financial statements including consolidated financial statements shall be issued , circulated or published with a copy of any notes annexed to or forming part of such financial statements, the auditor’s report and the Board’s report.

A copy of the financial statements including consolidated financial statements, auditor’s report and every other document required by law to be annexed or attached to the financial statements which are to be laid before the annual general meeting of the company shall be sent, not less than 21 days before the meeting, to every member of the company. In respect of a section 8 company, the documents are required to be sent 14 days before the meeting instead of 21 days.** Besides, a copy each must be sent to every trustee for the debenture holders of the company and to all other persons so entitled [Section 136(1)]. Under section 146 of the Act, the auditor, is entitled to receive all notices and communications relating to any general meeting.

If copies of documents are sent less that twenty-one days before as required, they may be deemed to be duly sent if agreed to by the requisite number of members. In case of a company having share capital, majority of the member entitled to vote and representing not less than ninety-five per cent of the paid-up share capital shall agree. If the company has no share capital, it must be agreed by members having not less than ninety-five per cent of the total voting power exercisable at the meeting.*

In case of a listed company the above requirements are deemed to be met if the copies of the documents as aforesaid are made available for inspection at its registered office during working hours for a period of twenty one days before the date of the meeting. In such a case a statement containing the salient features of such statements is sent not less than twenty one day before the date of the meeting [proviso 1 to Section 136(1)]. However if any shareholder asks for full financial statements, the same shall be provided.

The listed companies also need to place the financial statements and all other documents required to be annexed or attached thereto on its website including the separate audited accounts of each of its subsidiary companies. A copy of the separate audited financial statements of subsidiary companies shall also be furnished to the shareholders on demand [proviso 3 and 4 to Section 136(1)]. In case a listed company has a subsidiary incorporated outside India (foreign subsidiary) and the foreign subsidiary is statutorily required to prepare consolidated financial statement under any law of the country of its incorporation, it would be sufficient if consolidated financial statement of such foreign subsidiary is placed on the website of the listed company. Where such foreign subsidiary is not required to get its financial statement audited under any law of the country of its incorporation and which does not get such financial statement audited, it would be sufficient for the Indian holding to place such unaudited financial statement on its website and where such financial statement is in a language other than English, a translated copy of the financial statement in English is also required to be placed on the website.*

In case of listed companies with net worth of rupees one crore and turnover of more than rupees ten crore, the financial statements may be sent electronically. The Rule 11 of the Companies (Accounts) Rules, 2014 provides that financial statements may be sent electronically to those who are holding shares in dematerialized form and whose email ids are registered with depository for communication purposes. Likewise other members who have positively consented to receive the financial statements in electronic form, the financial statements may be sent electronically. Physical copies need to be sent to all other members.

Section 136(2) also requires that a company shall allow its members and debenture trustees to inspect the financial statements and other documents mentioned under sub-section (1). Such an inspection can be done at the registered office of the company during the business hours.

Any default in compliance of Section 136 attracts a penalty of rupees twenty-five thousand for the company and rupees five thousand for every officer who is in default.

8. Adoption and filing of Financial Statements

One of the businesses to be transacted at an Annual General Meeting is consideration and adoption of the financial statements and the reports of the Board of Directors and auditors including the balance sheet and the profit and loss account [Section 102(2)]. Every Annual General Meeting, other than the first Annual General Meeting is required to be held within six months of the close of the financial year [Section 96(1)].

It may be noted that the financial statements are required to be placed only at an Annual General Meeting and not at any other general meeting. The combined reading of Section 96(1) and Section 102(2) indicates that the financial statements shall be ready for placing before the A.G.M. within six months of the close of the financial year. In case the financial statements are not ready for laying at the appropriate annual general meeting, the company may adjourn the said annual general meeting to a subsequent date when the annual accounts are expected to be ready for laying. This may be done by adopting a suitable resolution adjourning the said annual general meeting to a specified date, or to a date to be specified later on. Section 116 of the Act however states that a resolution passed at an adjourned meeting shall be treated as having been passed on the date on which it has been passed. It follows that the adjourned Annual General Meeting should be held within the time frame laid down in Sections 96(1) and 102(2).

8.1 Filing of financial statements with the Registrar

Within thirty days of the date of the Annual General Meeting a duly adopted copy of the financial statements, including consolidated financial statement along with all the documents required to be annexed or attached to such financial statements, is required to be filed with the Registrar. If the financial statements are not adopted at the Annual General Meeting or the adjourned Annual General Meeting, the company shall file the un-adopted financial statements and the same are taken on record as provisional till the adopted financial statements are filed [Section 137(1) and proviso].

What happens if the Annual General Meeting for any year is not held within the time frame prescribed? In such a case the financial statements along with the necessary annexures and documents shall be filed with the Registrar within 30 days of the last date on which such Annual General Meeting should have been held. A statement explaining the facts and reasons for not holding the Annual General Meeting is also required to be submitted [Proviso to Section 137(1)]. In case of One Person Company, the financial statements shall be filed within one hundred and eighty days of the closure of the financial year.

A company having one or more subsidiaries which have been incorporated outside India and have not established a place of business in India is also required to file the accounts of its subsidiary or subsidiaries [proviso to Section 137(1)]. In case of a subsidiary incorporated outside India (foreign subsidiary) which is not required to get its financial statement audited under any law of the country of its incorporation and which does not get such financial statement audited, it would be sufficient for the Indian holding to file such unaudited financial statement alongwith a declaration to that effect and where such financial statement is in a language other than English, a translated copy of the financial statement in English is also required to be filed.*

If the financial statements along with all the necessary documents are not filed with the Registrar within thirty days of the Annual General Meeting or within thirty days of the last date before which it should have been held, the same may be filed under section 403(1) within a period of two hundred and seventy days thereafter with additional fees as may be prescribed. Any failure to file the financial statements as aforesaid within three hundred days (thirty plus two hundred seventy days) is considered a continuing default and both the company and officers in default are liable to punishment. The company shall be liable to a penalty of rupees ten thousand and a further penalty of rupee one hundred for every day during which the failure continues with a maximum of rupee two lakh. The managing director and the chief financial officer, if any or in absence of the managing director and the chief financial officer, any other director charged by the Board with responsibility under this section and in the absence of any such director, all the directors of the company shall be liable to a penalty of ten thousand and a further penalty of rupee one hundred for each day after the first during which such failure continues with a maximum of rupee fifty thousand.*

Even after retirement, a director would come under the definition of an ‘officer in default’ provided the offence has occurred during his stay in the office. Delhi High Court in Anita Chadha v. Registrar of Companies [1998] 18 SCL 304 has held that if it is not so held, then any managing director, director, manager or secretary would escape the provisions of sections 159 and 220 [Corresponding to Sections 92 and 137 of the Act] by simply tendering his resignation as the office bearer of the company.

8.2 Filing of financial statements in XBRL format

The Central Government may by notification require a certain class of companies to file their financial statements in Extensible Business Reporting Language (XBRL) format. The manner and filing may also be prescribed by the Central Government. XBRL is a standardized language to express, report or file information in an electronic form.

8.3 Reporting on revised annual statements of accounts

A need may arise for a company to reopen and revise its accounts even after their adoption in the annual general meeting. For example it may arise in order to meet the technical requirements of taxation laws or to meet the directions of the Insurance Regulatory and Development Authority by the insurance companies. The erstwhile Department of Company Affairs clarified that a company could reopen its accounts even after their adoption in the annual general meeting and filing with the Registrar of Companies in order to comply with the technical requirements of any other law to achieve the object of exhibiting true and fair view. The revised annual accounts would be required to be adopted either in the extraordinary general meeting or in the subsequent annual general meeting and filed with the Registrar of Companies – General Circular No. 1 of 2003, dated 13th January, 2003.

8.4 Re-opening of accounts on court’s or Tribunal’s orders

The Act allows the reopening of accounts and recasting the financial statements at the order of a court or the Tribunal. The application to the court or the Tribunal may be made by the Central Government, the Income Tax authorities, the Securities and Exchange Board of India or any other statutory regulatory body or any other person concerned. The court or the Tribunal, if of the opinion that the relevant accounts were prepared in a fraudulent manner or the affairs of the company were being mismanaged during the relevant time questioning the reliability of the financial statements, may order the accounts to be revised or re-casted. However, no order for re-opening of books of account relating to a period earlier than eight financial years immediately preceding the current financial year can be made. If the Central Government under Section 128(5) has ordered books of account to be kept for more than eight years, the books of account may be ordered to be re-opened with in such longer period* [Section 130(1)]. The accounts so revised or re-casted shall be final.

In Hari Sankaran v. Union of India [2019] 106 taxmann.com 76 (SC), the Supreme Court upheld the re-opening of books of account and re-casting financial statements of IL&FS and two other companies for past five years as conditions precedent for invoking section 130 were satisfied and a larger public interest was involved.

8.5 Voluntary revision of Financial Statements or Board’s Report

Section 131 of the Act permits the company to voluntarily revise its financial statements or Board’s report in respect of any of the three preceding financial years. If in the opinion of the directors the financial statements or Board’s report are not meeting the requirements of Section 129 or Section 134 respectively, the company may apply to the Tribunal for an approval to revise the financial statements or the Board’s report. The Tribunal after giving notice to the Central Government and the Income Tax authorities may by order permit such revision. Such revised statement or report shall not be prepared or filed more than once in a financial year. The company is also required to furnish the reasons for such a revision in the Board’s report of the financial year in which such revision is being made [proviso to Section 131(1)].

A company applied under section 131 for voluntary rectification of the Report of Board pertaining to procedural documents attached with financial statement or disclosures. ROC found that there would be no financial effect if revision was made in Report of Board and further, company undertook to pay tax dues and there was no pending complaint and inspection/investigation. The NCLT upheld the application to grant the approval. [Clues Network (P.) Ltd. v. Registrar of Companies, NCT of Delhi and Haryana [2018] 100 taxmann.com 171 (NCLT-Chd.)]

The provisions relating to re-opening and revision of financial statements and board’s report either voluntarily or on court’s orders or Tribunal’s orders have been introduced for the first time by the Act. There were no corresponding provisions in the earlier law.

9. Accounting Standards

Under Section 129(1) the financial statements shall comply with the accounting standards notified under Section 133 of the Act. The Directors’ Responsibility Statement prepared under clause (c) of Section 134(3) shall state that in the preparation of the annual accounts, the applicable accounting standards have been followed. Any material departures need to be explained. The Central Government may under Section 133 prescribe the standards of accounting or any addendum thereto as recommended by the Institute of Chartered Accountants of India. The recommendations of the ICAI need to be examined by the National Financial Reporting Authority. Till the time accounting standards are specified by the Central Government as aforesaid, the standards specified under the Companies Act, 1956 shall be treated as the accounting standards [Rule 7 of the Companies (Accounts) Rules, 2014].

9.1 Convergence of Accounting Standards in India with International Financial Reporting System (IFRS)

In view of a high degree of globalization of Indian businesses and to smoothen the two-way flow of investments, the ICAI at the behest of the MCA, took on hand the process of integration of Accounting Standards with Internationally Accepted Financial Reporting System (IFRS) so as to require large sized Indian companies to follow the IFRS Converged Accounting Standards. These converged accounting standards have been notified by the MCA as Indian Accounting Standards (Indian ASs). The Companies (Accounts) Rules 2014 has accordingly been amended. The financial statements need to be prepared in accordance with the requirements and definitions specified in the Accounting Standards (AS) or the Indian Accounting Standards (AS) Ind. as may be applicable.*

Every company other than companies on which Indian Accounting Standards (Ind AS) are applicable is required to comply with Accounting Standards (AS) 1 to 5, 7 and 9 to 29 as recommended by the Institute of Chartered Accountants of India.**

The MCA has notified a phased road map for the transition to Ind AS commencing from 1st April, 2016. It would be compulsory for the listed companies and certain other class of companies to follows Ind AS with effect from 1st April 2016 whereas other companies would be required to transit to Ind AS for the accounting periods beginning on or after 1st April, 2017. In respect of insurance companies, banking companies and Non-Banking Financial Companies, the transition to Ind AS would begin for the accounting period beginning from 1 April 2018.

9.2 National Financial Reporting Authority

The Central Government under section 132(1) is empowered to constitute a National Financial Reporting Authority (NFRA) for matters relating to accounting and auditing standards. The accounting standards as recommended by the Institute of Chartered Accountants of India are prescribed by the Central Government after considering the recommendations of the NFRA under section 133. The Government laid down rules relating to the functioning, powers, functions and duties of the National Financial Reporting Authority and processes for monitoring and enforcing compliance with accounting standards by the Authority***.

10. Internal Audit

Section 138 read with Rule 13 of the Companies (Accounts) Rules, 2014 requires the following class of companies to mandatorily appoint an internal auditor or a firm of internal auditors:

(a) every listed company;

(b) every unlisted public company having —

1. 1. 1. paid up share capital of rupees fifty crores or more during the preceding financial year; or
      2. turnover of rupees two hundred crores or more during the preceding financial year; or
      3. outstanding loans or borrowings from banks or public financial institutions exceeding rupees one hundred crore or more at any point of time during the preceding financial year; or
      4. outstanding deposits of rupees twenty five crore or more at any point of time during the preceding financial year.

(c) every private company having –

1. 1. 1. turnover of rupees two hundred crores or more during the preceding financial year; or
      2. outstanding loans or borrowings from banks or public financial institutions exceeding rupees one hundred crore or more at any point of time during the preceding financial year.

It is not compulsory that the internal audit shall be conducted by an outside firm; it may be conducted by the employees of the company as well. The internal audit shall be conducted by a chartered accountant or a cost accountant or any other professional as may be prescribed. The scope, periodicity, functioning and metho-dology for conducting the internal audit shall be finalized by the Audit Committee in consultation with the Internal Auditor.

AUDIT

After financial statements have been prepared, they need to be audited. The object of audit is two fold :

(a) to detect and prevent errors, and

(b) to detect and prevent frauds. For listed companies and for specified unlisted companies and private companies, accounts must be audited compulsorily.

11. Who can be appointed as an Auditor (Qualifications)?

Section 141(1) of the Act prescribes the qualifications and disqualifications for being appointed as a company auditor. An auditor of a company possessing the qualifications prescribed in section 141 of the Act is generally known as the statutory auditor of the company as he derives his duties, power and authority from the statute i.e., the Companies Act. According to section 141(1)

“A person shall be eligible for appointment as auditor of a company only if he is a chartered accountant”.

Section 2 (17) defines a chartered accountant as a chartered accountant who holds a valid certificate of practice under sub-section (1) of section 6 of the Chartered Accountants Act,

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1. For details see under ‘Register and Returns

*Inserted vide Notification No. G.S.R. 205(E) dated 24th March, 2021

2. Refer Compendium of Guidance Note, Vol. 1, 2nd Edition, Page 18-1, Issued by the ICAI.

3. For details see under ‘Register and Returns’.

*Amended vide the Companies (Amendment) Act, 2020, Notification dated 28 September 2020.

*Vide notification no. G.S.R. 404(E) [F. No.17/62/2015-CL-V], dated 6 April 2016

*The Schedule III has been further amended vide Notification No. G.S.R. 207 (E) dated 24 March, 2021.

**Amended vide Notification No. F. No. 1/2/2014-CL.V, dated 5 June 2015.

* Amended vide the Companies (Amendment) Act, 2017.

†Inserted vide the Companies (Amendment) Act, 2020, Notification dated 28 September 2020.

* Amended vide the Companies (Amendment) Act, 2017.

4. Inserted vide the Companies (Amendment) Act, 2015. Also see Para 19.24-4.

**Sub-clause (e) above shall not apply to the government companies. (Amended vide Notification No. F. No. 1/2/2014-CL.V dated 5 June 2015).

#Amended vide the Companies (Amendment) Act, 2017.

*Sub-clause (p) shall also not apply to a government company if the directors are evaluated by the Ministry or Department of the Central Government or State Government as per its own evaluation methodology. (Amended vide Notification No. F. No. 1/2/2014-CL.V dated 5 June 2015).

†Inserted vide the Companies (Amendment) Act, 2017.

*Inserted vide Notification G.S.R. 803(E) dated 22 October 2019.

**Amended vide Notification G.S.R 725(E) dated 31st July 2018.

***(xi) and (xii) Inserted vide Notification No. G.S.R. 205(E) dated 24th March, 2021.

*Rule 8A of Companies (Accounts) Amendment Rules, 2018, inserted vide Notification G.S.R 725(E) dated 31st July 2018.

**Inserted vide the Companies (Amendment) Act, 2017.

*Inserted vide the Companies (Accounts) Amendment Rules, G.S.R.107(E), dated 11 February 2022.

†Amended vide the Companies (Amendment) Act, 2020, Notification dated 28 September 2020.

**Amended vide Notification No. F. No. 1/2/2014-CL.I dated 5 June 2015.

*Inserted vide the Companies (Amendment) Act, 2017.

*Inserted vide the Companies (Amendment) Act, 2017.

*Amended vide the Companies (Amendment) Act, 2020, Notification dated 28 September 2020.

*Inserted vide the Companies (Amendment) Act, 2017.

*Vide notification dated 4th September 2015 (F No. 1/19/2013-CL-V-Part).

**The Companies (Accounting Standard) Rules, 2021 dated 23 June, 2021.

***National Financial Reporting Authority Rules, 2018. Vide Notification No. G.S.R 1111(E) dated 13 November 2018.