Scrutiny of Compliance with Accounting Standards by Registrar of Companies. - MMJC

Introduction

Section 133 of the Companies Act 2013 (‘the Act’) authorises 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 Institute of Chartered Accountants of India (‘ICAI’) on 7^th December 2009 and the same have 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 a 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 and therefore, 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, and hence, non-compliance of accounting standards does not fall under adjudication mechanism. However, , non-disclosure of violation of accounting standards is adjudicatable offence under different sections like section 134 or section 143 etc.

From the scrutiny of resent ROC orders, it is observed that, The ROC has been highlighting and penalising non-disclosure of non-compliances with accounting standards while preparing financial statements. In this article, we shall try to analyse 8 ROC orders in 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 last 6months, we may observe that, ROC has penalised the directors and auditors of the company for not disclosing about the violation of accounting standards in the directors responsibility statement (DRS) in the board report and in the auditor report as the case may be. the penalties has been levied under sections 134 and 143 respectively.

The orders are broadly classified under both these sections on the basis of the person on whom penalty is imposed. Wherever the AS have been violated by the company and the statutory auditors have not commented on the same, the penalty under section 143 has been imposed on auditor and wherever, the directors have not reported about non-compliance of AS in the DRS under director report, then the directors of the company are penalised 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	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 responsibility statement did not disclose that the company had failed to mention earning 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 directors responsibility statement forming part of 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 = 20,00010,000*2 = 20,00010,000*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 audit 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 is published in Taxmann. The link to the same is as follows: –

https://www.taxmann.com/research/account-audit/top-story/105010000000024196/scrutiny-of-compliance-with-accounting-standards-by-registrar-of-companies-experts-opinion

This article is written by Rutuja Umadikar – Research Associate – rutujaumadikar@mmjc.in and Isha Jain – Management Trainee.