LIABILITY OF AUDITORS UNDER COMPANIES ACT, 2013

LIABILITY OF AUDITORS UNDER COMPANIES ACT, 2013

Lord JusticeTopes had once famously remarked that The auditor is a watchdog and not a bloodhound. Companies Act,2013 does not seem to echo this thought! The kind of stringent measuresprescribed in the Companies Act 2013 against auditors gives the picture that the Act indeed expects the auditors to be bloodhounds in discharging their dutiesand not merely as watch dogs. The Satyam saga seems to have cast a very loomingimage in the minds of regulators as far the auditors are concerned.
In the current write up, we have brought out the penal provisions and the actions which can be initiated by various regulatory and non regulatory authorities in case of any lapse on the part of the Auditors in discharging their duties effectively.
ؠ Penalty for non-compliance with any of the provisions contained in Sections 139, 143, 144 and 145 of the Act
Section 139 contains provisions regarding appointment of auditors, Section 143 regarding power and duties of auditors, Section 144 regarding certain services which an auditor cannot render and Section 145 regarding signing of audit report and other documents by auditor.
Auditor shall bepunishable with fine which shall not be less than Rs. 25,000/- but which may extend to Rs. 5,00,000/-
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, heshall be punishable with imprisonment for a term which may extend to 1 yearand with fine which shall not be less than Rs. 1,00,000/- but which may extend to Rs. 25,00,000/-.
If the auditor is convicted under any of these sections, he shall be liable to refund the remuneration received by him from the Company and pay for damagesto the company, bodies or authorities or to any other persons for loss arising out of incorrect or misleading statements of particulars made in his audit report.
ؠ Penalty for failure to disclose fraud
As per Section 143(12), an Auditor is duty bound that if in the course of the performance of his duties as auditor, he has reason to believe that an offence involving fraudis being or has been committed against the company by officers or employees ofthe company, he shall immediately report the matter to the Central Government.
In case of any failure on his part to comply with this duty, he shall be punishable with fine which shall not be less than Rs. 1,00,000/- but which may extend to Rs. 25,00,000/-.
ؠ Penalty for professional misconduct NFRA – Watch on the watch dogs!
National Financial Review Authority (NFRA) shall have power to investigate, either suo motu or on a reference made to it by the Central Government into the matters of professional or other misconduct committed by any member or firm of charteredaccountants, registered under the Chartered Accountants Act, 1949.
Where professional or other misconduct is proved, NFRA shall have the power to make order for
(A) imposingpenalty of

1. I) notless than Rs. 1,00,000/-, but which may extend to five times of the fees received, in case of individuals; and

(II) notless than Rs. 10,00,000/-, but which may extend to ten times of the fees received, in case of firms;

1. B) debarring the member or the firm fromengaging himself or itself from practice as member of the Institute of Chartered Accountant of India referred to in clause (e) of sub-section (1) of section 2 of the Chartered Accountants Act, 1949 for a minimum period of 6 months or for such higher period not exceeding 10 years as may be decided by the National Financial Reporting Authority.

ؠ Action in case of fraud by auditors
Change of auditors by NCLT
Without prejudice to any action under the provisions of this Act or any other law for the time being in force, the NCLT either suo motu or on an application made to it by the Central Government or by any person concerned, if it is satisfied that the auditor of a company has, whether directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers, it may, by order, direct the company to change its auditors.
An auditor, whether individual or firm, against whom final order has been passed by the Tribunal under this section shall not be eligible to be appointed as an auditorof any company for a period of 5 years from the date of passing of the orderand the auditor shall also be liable for action under section 447.

• Disqualification for appointment asauditor

A person who has been convicted by a court of an offence involving fraud and a period of 10 years has not elapsed from the date of such conviction shall be disqualified tobe appointed as auditor of any company.

• Action under Section 447

Without prejudice to any liability including repayment of any debt under this Act or any other law for the time being in force, any person who is found to be guiltyof fraud, shall be punishable with imprisonment for a term which shall not beless than 6 months but which may extend to 10 years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but whichmay extend to 3 times the amount involved in the fraud.

• Liability of firm

Where, in case of audit of a company being conducted by an audit firm, it is proved that the partner or partners of the audit firm has or have acted in a fraudulent manneror abetted or colluded in any fraud by, or in relation to or by, the company orits directors or officers, the liability, whether civil or criminal as provided in this Act or in any other law for the time being in force, for such act shallbe of the partner or partners concerned of the audit firm and of the firm jointlyand severally.
ؠ Class Action Suits
Any 100 or moremembers/deposit holders of the company or 10% of the total number of members/deposit holders of the company can file a class action suit to claimdamages or compensation or demand any other suitable action against the auditor in the manner prescribed under Section 245 of the Act.
Action under this section can be initiated against the auditor including audit firm of the company for any improper or misleading statement of particulars made in theaudit report or for any fraudulent, unlawful or wrongful act or conduct.
Where the members or depositors seek any damages or compensation or demand any other suitable action from or against an audit firm, the liability shall be of the firm as well as of each partner who was involved in making any improper ormisleading statement of particulars in the audit report or who acted in a fraudulent, unlawful or wrongful manner.
Author
CS Dhanapal
E-mail: [email protected]
*********************************************************************************************