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Unit 14: Audit of a Partnership Accounts and Government Company

14.2.6 Disqualifications of Auditors Notes

The Committee deliberated on issues relating to disqualification of Auditors. The relevant
provisions of the Companies Act in different countries including those existing in India as well as
the views of the ICAI on the matter were discussed. The Committee was of the view that the
Auditors’ position and responsibilities involved access to sensitive market information particularly
relating to the profits of the company. There was a possibility of misuse of such information. A
view was expressed that the existing ban on an Auditor owning securities of the auditee company
should be reviewed and that a concept of materiality be introduced. Considering the wide variation
in the sizes of companies, a common prescription to be legislated under law would be difficult.
The Committee, therefore, feels that at present there may not be any change in the existing
framework. However, the matter may be examined further by the Government in context of the
framework of ethical conduct and statutory requirements under the Chartered Accountants Act,
1949 in consultation with ICAI. The conclusions that emerged out of the discussions and deliberations
are summed up as follows:

The amount of indebtedness/guarantee be increased beyond the present limit of `1,000/- and such
a limits could be prescribed under Rules. The indebtedness/guarantee of the Auditors should also
be extended to cover indebtedness/guarantee to the Directors and all entities whose financial
statements are required to be consolidated under the Act. The disqualification envisaged under the
Act/Rules should be applicable not only to the Auditors but also to his relatives, (the term relatives
being defined under the Companies Act) any of the associates of the auditor and any entity in
which the Auditor has a substantial interest. ·The Auditor should disclose holdings in the securities
of the company, if any, at the time of appointment. However, the Committee feels that the Auditor
would be privy to insight financial information of the company and there could be possibility of
making wrongful gain by the Auditors by mis-utilizing such information. The work of the Auditor
should be credible and free from conflict of interests. Therefore, the Committee are not in favour
of relaxing the prohibition on holding of shares or securities of the subject company by the
Auditor. The matter should be examined by the Government in consultation with the ICAI.

Appointment of Auditors other than Retiring Auditors

The Committee discussed and agreed that the existing provisions of the Companies Act relating
to appointment of Auditors were well established and should continue. However, the retiring
auditor should be appointed if in the Annual General Meeting, the accounts of the company for
the immediately preceding financial year are not approved.

Duties and Liabilities of Auditors

Auditors have the general duty of discharging their statutory functions with care and diligence.
Many stakeholders would rely on the auditor’s reports for accessing the financial picture of the
company. However, there cannot be any specific prescription of negligence keeping in view the
expectations of all the stakeholders. However, auditors are required to carry out their work
within the discipline of the legal provisions and the standards of accounting/Accounting
Standards (where notified). There is a necessity that the work of the auditors should uphold the
highest standards of excellence and independence. Non-compliance with such standards should
invite stringent penalties. The Committee was of the view that the basic duties of the Auditors
and their liability need to be laid down in the law itself instead of in the Rules. Quantification of
penalty for Auditors may be prescribed in the Rules.

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