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Auditing Theory

Notes Committee felt that the rules may provide for preservation of books of account and records of
the company for a period of 7 years to bring it in harmony with Income Tax Act.

Form of Accounting Records and Accounting Standard

In order to bring about more transparency and uniformity in the maintenance of accounts, the
Committee felt that the companies should continue to be mandated to maintain their books of
accounts on accrual basis and double entry method of book keeping. The question arose before
the Committee as to whether the form and content of the financial statements needs to be
specified separately in the Act or should be left to the Accounting Standards prescribed by the
Central Government in consultation with NACAS. After considerable deliberations, it was
decided that the form and content of the financial statements and the disclosures required
therein need to be provided for under the Act/Rules. Any changes made in the Accounting
Standards could be factored in the Act/Rules from time to time. It was also decided that the
companies should be given the option to maintain the records in electronic form capable of
conversion into hard copy.

Maintenance of Records outside the Country

The companies should have an option to keep records outside the country provided financial
information in compliance with the Companies Act is available within the country and written
notice is given to the Registrar of the place where the records are kept. However, such a Company
should be obligated to produce the records that are kept outside the country, if and when
required to do so as specified in the Rules.

Cash Flow Statement to be made Mandatory

World over, the importance of Cash Flow Statement is being specifically recognized. At present,
the listed companies are mandated to include a Cash Flow Statement in the Annual Report and
the Standards of Accounting prescribed by ICAI also requires in specified cases a Cash Flow
Statement to be submitted along with the Balance Sheet and Profit & Loss Account with a view
to make Cash Flow Statement mandatory. The Committee felt that there was a need to include
the definition of the term Financial Statement in the Act, to include Profit & Loss Account,
Balance Sheet, Cash Flow Statement and Notes on Accounts.

Relaxation/Exemption to Small Companies

The Committee was of the view that Small Companies need not be subject to the costs of a
regime suited to large companies with a wide stakeholder base. Relaxations to small companies
with regard to the format of accounts to be prescribed in the Act/Rules may also be considered.
If necessary, a separate format for small companies may be devised. Exemptions from certain
disclosures may also be considered and relaxations, if any required, in respect of compliance
with Accounting Standards may be provided for while notifying the Accounting Standards. If
necessary, a separate Accounting Standard may be framed for small companies.

Financial Year

The Companies Act at present does not contain any provision relating to the minimum period
of a Financial Year. The Concept Paper has defined the Financial Year with the minimum
period of six months. The Committee dwelt on the subject and came to the conclusion that the
first financial year should begin from the date of incorporation and end on the immediately

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