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Cos Act, 2013: Audit Rotation & Other Rules

Published on Mon, Mar 31,2014 | 18:01, Updated at Mon, Mar 31 at 18:41Source : 

By: Yogesh Sharma, Partner – Assurance, Grant Thornton India


MCA today, on 31 March 2014, notified additional rules for Companies Act 2013 including the rules on Chapter X, ‘Audit and Auditors’. This notification comes just a day ahead of the effective date for these final rules which is tomorrow i.e. 1 April 2014.

The draft rules on Chapter X issued earlier by MCA received a lot of attention from the industry and auditing profession, alike, and several concerns were raised and comments made to address the challenges anticipated by the respondents. MCA in the final rules has made some significant changes from the draft rules to address some of the perceived challenges and to clarify certain other key matters.

A significant change from the draft rules is that the final rules define a more practical threshold for identifying the class of companies, in addition to all the listed companies, for which the auditor rotation shall be required. The final rules prescribe that unlisted public companies with a paid up share capital of Rs.10 crores or more, private limited companies with a paid up share capital of Rs.20 crores or more, and companies with public borrowings from financial institutions, banks or public deposits of Rs.50 crores or more will have to comply with the auditor rotation requirement. This is a welcome change as it shall provide significant relief for smaller companies, and to their auditors, from auditor rotation requirement not covered within these thresholds without muting the intent of the legislation.

The final rules also clarify another significant matter relating to the auditor rotation requirement for determining the maximum term for the existing auditors. The final rules prescribe, and even use an illustration to clearly clarify, that the past terms of the existing auditors shall also have to be considered to determine the expiry of the maximum term of the auditors. This implies that for situations where an individual auditor, or the audit firm, are due to complete the maximum term in office of 5 years and 10 years, respectively, will have to rotated out at the end of the 3-year transitional period starting from 1 April 2014. This change should also be widely appreciated as it positively reinforces the intent of MCA behind the legislation to make the auditor rotation effective as soon as practicable. Further, the final rules also clarify that the auditor appointment shall have to be specifically ratified through an ordinary resolution by the members a company in its AGM, failing which the auditor appointment shall not be valid. This effectively results into an annual appointment instead of a fixed term appointment.

Another significant change brought in by the final rules is around the requirement for fraud reporting by the auditors. The requirement to report directly to the Central Govt. has been modified. Also, the final rules now expand the timeline for fraud reporting to a 60-day period from the 30-day period prescribed in the draft rules. Thus, now the auditor is first required to report the fraud to the board/ audit committee seeking their reply within a 45-day period and post receipt of the reply within 15-day period report the fraud to the Central Govt. along with the response received from the board/ audit committee. The concept of materiality and the quantitative and qualitative thresholds prescribed in the draft rules have been removed.

Some of the other clarifications that come as a practical relief to the auditing profession include increasing the level of indebtedness resulting in disqualification to Rs.5 lacs from Rs.1 lac prescribed in the draft rule. Also, now the auditor’s business relationships leading to disqualification shall no longer include commercial transactions in the nature of ordinary course and at an arm’s length.

Without a doubt, these final rules establish carefully thought guidelines by MCA and shall prove useful in implementing the requirements of the Act effectively.


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