- Quick Contact:
- +91 22 2167 8100
Scrutiny of Compliance with Accounting Standards by Registrar of Companies. - MMJC
Section 133 of the Companies Act 2013 (‘the Act’) authorises the Ministry of Corporate Affairs (‘MCA’) in consultation with National Financial Reporting Authority (‘NFRA’) to prescribe the accounting standards to be followed by companies while preparing the financial statements. Accordingly, MCA had notified accounting standards prescribed by the Institute of Chartered Accountants of India (‘ICAI’)on 7th December 2009and the same has been continued under the Act as well. Because the accounting standards relate to true and fair disclosure of financial statements, compliance with the same has great importance in the eyes of all the regulators.
The requirement of complying with accounting standards while preparing financial statements comes from section 129 of the Act. Therefore, a consequence of non-compliance with the same also originates from the Act itself.
Section 129 of the Act provides for compounding of offence in case of non-compliance. Hence, non-compliance with accounting standards does not fall under the adjudication mechanism. However, non-disclosure of violation of accounting standards adjudicates offence under sections like section 134 or section 143, etc.
From the scrutiny of recent ROC orders, it is observed that the ROC has been highlighting and penalizingnon-disclosure of non-compliance with accounting standards while preparing financial statements. In this article, we shall try to analyze8 ROC orders in the context of non-disclosure of violation of accounting standards and try to understand what caution is required to be taken by officers of the company in this regard.
Analysis of ROC orders.
If we study the adjudication orders passed by ROCs in the last 6months, we may observe that, ROC has penalizedthe directors and auditors of the company for not disclosing the violation of accounting standards in the director’s responsibility statement (DRS) in the board report and in the auditor’s report as the case may be. The penalties have been levied under sections 134 and 143 respectively.
The orders are broadly classified under both these sections based on the person on whom the penalty is imposed. Wherever AS has been violated by the company and the statutory auditors have not commented on the same, the penalty under section 143 has been imposed on the auditor and wherever the directors have not reported about non-compliance of AS in the DRS under the director’s report, then the directors of the company are penalized for not giving true and fair disclosure in the financial statements.
Orders under section 134.
The following orders passed under section 134 of Companies Act 2013 have been bifurcated in the table below highlighting the important aspects of these orders:
| Name of the Company and Adjudicating Officer | Details of Violation | Penalty |
| Wellman Wacoma Engineering Private Limited – ROC Kolkata | The company had not written off its preliminary expenses as per AS-26. This fact was not mentioned in the DRS by the directors. | Penalty:u/s 134(8) On company: Rs 3,00,000/- On 2 Directors: Rs 50,000/- each. |
| Wellman Wacoma Engineering Private Limited – ROC Kolkata | The financial statements of the company for the particular FYs did not disclose as to who are the related parties as per AS-18.& this non-compliance was not highlighted in the DRS. | Penalty u/s 134(8): On company: Rs 3,00,000/- On 2 Directors : Rs 50,000/- each. |
| Wellman Wacoma Engineering Private Limited – ROC Kolkata | The director’s responsibility statement did not disclose that the company had failed to mention earnings per share (EPS) in the P&L account as required under AS-20. | Penalty u/s 134(8): On company: Rs 3,00,000/- On 2 Directors : Rs 50,000/- each. |
Observations from the orders.
Section 134(5)of the Act states that the director’s responsibility statement forming part of the boards report should contain a statement regarding compliance with applicable accounting standards. In all the above mentioned orders, there have been lapses on the part of the company in complying with applicable accounting standards and in spite of that the board in its report has made a statement that the company has fully complied with all applicable accounting standards. Making of such statement by the board has been considered as non-disclosure of true and fair view of company’s possession and hence penalty is imposed on directors.
Orders under section 143.
The following orders passed under section 143 have been bifurcated in the table below.These orders highlight the situations wherein the statutory auditors have failed to highlight the non-compliance with applicable accounting standards in the audit report.
| Name of the Company and Adjudicating Officer | Details of Violation | Penalty |
| Bhagirathi Vanijya Private Limited -ROC Kolkata | The auditor in his report has not commented on the fact that the company has not reported basic and diluted earnings per share in its P&L a/c as required by AS20. | On Auditor 10,000*2 = 20,000 10,000*2 = 20,000 10,000*1 = 10,000 |
| Mars Mercantiles Private Limited -ROC Kolkata | The auditor in his report, failed to highlight that the company has not disclosed the names of shareholders having more than 20% voting rights as related parties as required by AS-18. | On Statutory Auditor: Rs 1,50,000/- |
| Sun Pharmaceuticals Industries Limited – ROC Ahmedabad | The company did not disclose material related party transaction details as per the requirement of IND AS-24 of m/s Aditya Medisales Ltd. And the auditor did not report this non-compliance in his report. | On Auditor’s Firm. 10,000+ 1,000 per day Maximum Penalty =50,000/- |
| The Peerless General Finance & Investment Company Ltd – ROC Kolkata | Investment in right to property was classified as current investment, whereas it should have been classified as non-current investment as per AS-13. The auditor has not highlighted this non-compliance in the audit report. | On Statutory Auditor: Rs 1,80,000/- |
Observations of orders under section 143
The statutory auditor through his auditor’s report, is required to highlight to the shareholders and regulators about any kind of non-compliance done by the company while preparing financial statements. In the cases discussed above, the auditor has failed to fulfil his duty of reporting non-compliance and hence auditor has been made liable to pay penalty.
Conclusion
As mentioned in the beginning, violation of accounting standards itself is a compoundable offence which may end up imposing heavy fines on the company and its officers in default. In addition to that, the analysis of above orders shows that, non-disclosure of such violation leads to altogether different non-compliance resulting in to separate penalty. Therefore, companies have to be extremely careful with respect to compliance with accounting standards, if there is any violation of accounting standards or non-disclosure thereof by the company, then both, directors and statutory auditors will have to face the consequences of the same.
This article has been published on Taxmann. The link for the same