LIABILITY AND DISQUALIFICATION OF AUDITOR

According to Section 147(2) of the Companies Act 2013 discussed earlier here, if an auditor of a company contravenes any of the provisions of section 139, section 143, section 144 or section 145, the auditor shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees. If an auditor has contravened such provisions knowingly or willfully with the intention to deceive the company or its shareholders or creditors or tax authorities, he shall be punishable with imprisonment for a

term which may extend to one year and with fine which shall not be less than one lakh rupees but which may extend to twenty-five lakh rupees.

Rule 9 of the Companies (Audit and Auditors) Rules 2014, in case of criminal liability of any audit firm, the liability other than fine, shall devolve only on the concerned partner or partners, who acted in a fraudulent manner or abetted or, as the case may be, colluded in any fraud.

Disqualifications [Section 141(3)]

We have discussed bare provisions of this section earlier here. Now, We discuss these provisions read with Rule 10 of Companies (Audit and Auditors) Rules 2014.

Following persons shall not be eligible for appointment as an auditor of a company:

(a) A body corporate other than a limited liability partnership;

(b) An officer or employee of the company;

(c) A person who is a partner or who is in the employment of an officer of employee of the company;

(d) A person who or his relative or partner:

(i) is holding any security of or interest in, or

(ii) is indebted to, or

(iii) has given a guarantee or provided any security in connection with the indebtedness of any third person to the company, its subsidiary, or its holding or its associate company or a subsidiary of such holding company;

For sub – clause (i) here, the relative may hold security or interest in the company of face value not exceeding one thousand rupees or such sum as may be prescribed.

For the purpose of this proviso to sub-clause (i) of clause (d) of sub-section (3) of section 141, a relative of an auditor may hold securities in the company of face value not exceeding rupees one lakh. The condition under this sub-rule shall, wherever relevant, be also applicable in the case of a company not having share capital or other securities. In the event of acquiring any security or interest by a relative, above the threshold prescribed, the corrective action to maintain the limits as specified above shall be taken by the auditor within sixty days of such acquisition or interest. [Rule 10(1) of the Companies (Audit and Auditors) Rules 2014]

Sub rules (1) talk about face value of security with reference to proviso to sub-clause (i) of clause (d) of sub-section (3) of section 141 about securities and interest. Relevant Proviso say that the relative may hold security or interest in the company of face value not exceeding one thousand rupees or such sum as may be prescribed. The sub rule provide for security only, not about interest. In my humble interpretation, exemption in relation to securities is for securities with face value up to rupees one lakh but in case of any other interest, exemption is only upto rupees one thousand as provided in the proviso to sub-clause (i) of clause (d) of sub-section (3) of section 141. BE CAREFUL.

For the purpose of sub-clause (ii) of clause (d) of sub-section (3) of section 141, a person who or whose relative or partner is indebted to the company or its subsidiary or its holding or associate company or a subsidiary of such holding company, in excess of rupees five lakh shall not be eligible for appointment. [Rule 10(2) of the Companies (Audit and Auditors) Rules 2014]

For the purpose of sub-clause (iii) of clause (d) of sub-section (3) of section 141, a person who or whose relative or partner has given a guarantee or provided any security in connection with the indebtedness of any third person to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, in excess of one lakh rupees shall not be eligible for appointment. [Rule 10(3) of the Companies (Audit and Auditors) Rules 2014]

(e) a person or a firm who, whether directly or indirectly, has business relationship with the company, or its subsidiary, or its holding or associate company or subsidiary of such holding company or associate company of such nature as may be prescribed;

For the purpose of clause (e) of sub-section (3) of section 141, the term “business relationship” shall be construed as any transaction entered into for a commercial purpose, except -

(i) commercial transactions which are in the nature of professional services permitted to be rendered by an auditor or audit firm under the Act and the Chartered Accountants Act, 1949 and the rules or the regulations made under those Acts;

(ii) commercial transactions which are in the ordinary course of business of the company at arm’s length price – like sale of products or services to the auditor, as customer, in the ordinary course of business, by companies engaged in the business of telecommunications, airlines, hospitals, hotels and such other similar businesses. [Rule 10(4) of the Companies (Audit and Auditors) Rules 2014]

(f) a person whose relative is a director or is in the employment of the company as a director or key managerial personnel;

(g) a person who is in full time employment elsewhere or a person or a partner of a firm holding appointment as its auditor, if such persons or partner is at the date of such appointment or reappointment holding appointment as auditor of more than twenty companies;

(h) a person who has been convicted by a court of an offence involving fraud and a period of ten years has not elapsed from the date of such conviction;

(i) any person whose subsidiary or associate company or any other form of entity, is engaged as on the date of appointment in consulting and specialised services as provided in section 144.

The service under this section 144 are:

• accounting and book keeping services;
• Internal audit;
• Design ad implementation of any financial information system;
• Actuarial services;
• Investment advisory services;
• Investment banking services;
• Rendering of outsources financial services;
• Management services; and
• Any other kind of services as may be prescribed.

I understand, at the time of writing this blog post nothing has been prescribed under this clause