Download Accounting & Auditing: Transparency & Fraud Reporting under Companies Act 2013 and more Thesis Law in PDF only on Docsity!
Question 1: Companies have to maintain proper accounts in order to
maintain transparency. Evaluate the note of auditors in preventing
corporate frauds.
Every kind of company needs to maintain the track of their accounting considering in the end of financial year it is their responsibility to submit the properly reviewed accounting to the concerned authority of the government so that the transparency with regards to the company can be maintained and the shareholders get the view of financial strength and performance of a company which has to be kept at registrar office or any other place in India according to the decision of Board of Directors of which the notice to ROC should be sent with regards to the full address of the place within 7 days as per Section 128 , so that the shareholders should know the real view of the affairs of the company and can take the decisions accordingly. It is imperative to mention that not only the Companies Act 2013 but also Rule 3 of Company Rules 2014 with an intention for transparent view provide the provision with regards to the manner of books of accounts which has to be kept in electronic mode so that it shall be accessible to the entire country and can be retained completely in the same manner in which it had been sent or received without any alteration and this record cannot be disposed off by anyone unless it has been permitted by law. It has to be note that if by any chance company or any responsible officer failed to comply with the provision then there is a liability of punishment for the imprisonment which may extend to one year or fine of minimum Rs.50,000 which may extend to Rs.5,00,000 or both. Keeping this aspect into consideration and witnessing the struggle of company in maintaining books of accounts properly, government realised the need of an auditor in the corporation which could be any Chartered accountant in practice or any Partnership Firm of Chartered Accountants as per Section 141 of the Companies Act 2013 considering they are an independent outsider of the corporation who can detect any irregularities, fraud, technical errors or any kind of errors regarding the principle in the accounting of the company without any biasedness by way of auditing. It has been witnessed in the case of Dharangdhara Chemical Works vs. State of Saurashtra, where the honourable Apex Court opined that the Charterd Accountant who is a whole-time employee of the company cannot be appointed as the auditor of the same company. Even, In the case of Newton v. Birmingham Small Arms Company , the honourable court observed that the rights of an auditors are statutory rights which cannot be taken away by the Articles of Association of a company.
Every position in a corporation provides the right as well as duties to the person who is holding that position, similarly, in the case of auditor there are certain duties under Section 143 which they have to fulfil towards the members of the company: Auditors have the duty to review and examined the accounts and note that whether the information received by him is best to his knowledge and can be taken into consideration for the audit or whether the books of accounts has been properly maintained in compliance with the law and audit standards or whether books and accounts of any other branch of the corporation audited by person other than companies auditor has been sent to him or whether the balance sheet and profit and loss account of the company had an agreement with the books of accounts and returns. The auditor also has a duty to inquire about the security loans or the personal transactions or the issue of shares for cash or any other loans or investment etc. made by the company. Auditor also has the duty to attend general meeting and present the audit report which needs to be signed by him. This is also the duty of auditor not to provide different services to one corporation in same time which involves the audit of books and accounts, internal audit and any other types of services with regards to the consultancy. However, one duty of auditor which is most important towards the company is to report of any fraudulent transaction by giving the adverse remark on it and the maintenance of accounts. It is a very well-known fact that the meaning of fraud has been defined on the provisions which include Indian Contract Act as well as the Companies Act 2013 amongst which Indian contract act does not provide the responsibility of any person to report, however, Section 143 of the Companies Act 2013 explicitly gives the responsibility to auditor to report about the fraud which has been committed by officers or the employees of the company only either to the audit committee or to the board of directors by mentioning it in the audit report immediately and not later than 2 days which include the name and position of the responsible person, after which, it becomes the duty of the board of directors or the audit committee to whom the auditor reported about the activity to give a reply or observation within 45 days so that the auditor can forward the report along with the reply of board of directors or audit committee to the Central Government within 15 days, however, if the board of director or audit committee within the prescribed time limit does not able to send any
concept of majority rule which is why it enacts the provision under Section 47 of the Companies Act, 2013 which states that every individual who holds the equity shares in the company has the proper right to vote with regards to the decision made by the corporation considering this right of member has been acknowledged as an asset of the corporation and moreover, the shareholder may exercise this right as he deems necessary in accordance with the interest of him and other shareholders. It has to be taken into consideration that the Special Resolution in a meeting of a company requires 3/4th^ of the vote for majority resulting to the fulfilment of any demand or any action where a simple majority cannot be worked efficiently which is why any resolution passed by the majority of shareholders on any matter with regards to the corporation has been binding on the minority as well as on company. Undoubtedly, the said provision strictly restrict the court to interfere in the internal matters with regards to the Company, however, if any decision hampers the interest of minority shareholders, then the Companies Act provide provisions to protect the interest with an intention to strike a balance between the interest of all the shareholders and the interest of company. It has been witnessed in the case of Foss vs. Harbottle where the honourable court laid down the principle of non-interference which helps the legal system to acknowledge the importance of the decisions taken by majority shareholders as well as give the direction to discourage and avoid the multiple number of suits. Hence, any kind of disagreement or dissatisfaction of minority shareholders with the decisions of majority shareholders lead to oppression and mismanagement except in the cases where the ideologies of minority members have been disregarded and jeopardized the actions of superior members of the company resulting to oppression and mismanagement. Therefore, the Companies Act, 2013 provides the provision under Section 241-Section 246 along with Chapter XVI which focuses on the issues with regards to oppression and management in order to maintain a balance between the interest of members of company. It is imperative to mention that neither the legislature nor the judiciary provide the meaning of mismanagement, despite of that, it can be stated any kind of modifications in the management or control of company which has the potential to injure the interest of public and has been carried out in a way that is prejudice to the company by its members or the interest of members themselves or any class of members can be considered as mismanagement. On the other hand, the definition of word oppression asserts about the situation or any action which is cruel or unjust in nature and has been done with the intention to abuse or maltreat
the company by making the private agreements among members or public or members which has been mentioned in Section 2 of the Companies Act, 2013 with unnecessary disturbances. It has been witnessed in the case of Shanti Prasad Jain vs. Kalinga Tubes where the honourable Apex Court opined that to establish the oppression and mismanagement it is necessary that the majority has misconducted their rights against the minority. Similarly, in the case of Vikram Bakshi vs. McDonald , the National Company Law Tribunal by interpreting the entire concept of oppression and mismanagement in a unique way held that there was an oppression and mismanagement towards the aggrieved party. However, the same NCLT in the case of Siddharth Gupta and Others vs. M/s Getit Infoservices Pvt. Ltd. and Others opined that mere violation of company’s articles of association does not amount to oppression and mismanagement considering it is important that the conduct of operation and mismanagement has been done continuously. It has to be taken into consideration that in case of any kind of dispute with regards to the oppression or mismanagement, only the person who has the authority to file the application against it as per Section 244 of the Act, i.e., lower of 100 members or 1/10th^ of total members who hold 1/10 of the issued share capital of the company having share capital or 1/5th^ of total members of company not having share capital, government can knock the doors of the National Company Law Tribunal under Section 242 of the companies Act, 2013 with an intention to obtain the prompt and comprehensive remedy. The Tribunal under the said provision has certain powers: The potential regulation on the conduct of business of corporation. The buying of the shares or any kind of interest by the member of company or the company itself in favour of other members. The detriment of the share capital of company considering the company buys its own share. Restraints of transmission, transfer or allotment of the shares of company. Any kind of Alteration, and elimination, termination of any agreement by the tribunal between the company and managing director only if it feels fair and equal in that situation. The termination, elimination, and alteration of any agreement between the corporation and any other person who has not been referred in the aforementioned clause (e).
held either at registered office or at any place of the city where the registered office has been situated irrespective of the fact that the accounts of company has been properly prepared or not because it is necessary for every corporation irrespective of its size or type to hold this meeting annually and not later than six months from the closing of financial year, however, it also needs to be taken into consideration that there should not be a difference of more than 15 months between two annual General meeting, even so, in case of newly incorporated corporation, the act showed the leniency by allowing the corporation to hold Annual General Meeting within 18 months. Although, this have to be stated that the statute is not very stringent in nature considering after taking the permission of registrar the annual general meeting can be extend which cannot be exceed the period of 3 months. There are certain requisites which has to be followed for a valid annual General meeting: The notice for annual General meeting should be sent to all the members and shareholders before at least clear 21 days which does not include any public holiday as well as the day on which the notice has been served and the day of meeting. It is important to have minimum number of persons which are commonly known as quorum to be present at the meeting otherwise the meeting will be adjourned to the same day in the next week at the same time and place or the present members will represent the meeting if required. It is a very well-known fact that the violation of any provision of any statute cannot be tolerated which is why if the company failed to hold annual general meeting within prescribed time period then any member of the company can file the complaint to National Company Law Tribunal with the request to conduct the meeting and that Tribunal will give necessary direction to conduct the meeting as per Section 98, however, if the company still fails to abide by the order of tribunal then the defaulting officer will have to face the penalty of maximum Rs.1,00,000 which may extend to Rs. 5000 per day if he continues with the failure of compliance of the order as per Section 99 of the Act. It has been witnessed in the case of B.R. Kundra, Delhi vs. Motion Pictures Association where the honourable High Court of Delhi held that because of not proper Annual General meeting, the directors can continue with their positions. Therefore, it can be concluded that the Annual General Meeting is the get together of the shareholders and the members of company which is important for the evaluation and
discussion with regards to the performance of company and the changes which should be done from the perspective of growth of company in future. Interested Director and their portion It is a very well-known fact that a company is an imaginary and undetectable artificial person which lacks all the qualities of human being resulting to the operation of corporation by a living individual which can be known as directors of the company which has been appointed by the shareholders of the company according to law to control, direct and manages the affairs of the company as per Section 2 of the Companies Act, 2013. It is important to note that Articles of Association lay down that public company needs to have 3 directors minimum, whereas, a private company should have minimum 2 directors which cannot be exceed more than 15 directors except passing the special resolution for more than 15 directors in the company from the date of incorporation till the death of the company. According to the provision under Section 149 of the Companies Act, 2013 it is necessary for every company to have a board of directors which consist of each and every director. It has been witnessed in the case of Oriental Metal Pressing Works Pvt. Ltd. vs. B.K. Thakoor where is the honourable Apex Court asserted about the reason behind the individual as a director of a company. There are different kinds of director in the company who cannot keep their personal interest over the interest of company and shareholders, however, Interested Director is totally different from them considering they are the directors who have the personal interest which is in conflict with the interest of corporation or shareholders in that irrespective of the fact that the director himself/herself have been directly interested or the relatives of directors are interested and the fact of pecuniary interest is not also relevant. According to Section 184 of the Companies Act 2013 if the director has any kind of interest, then it is his/her duty to disclosed that by sending notice of such interest in the board meeting of the financial year or if he is already a director of the company and then his personal interest is conflicting with interest of company then the disclosure should be made in the first board meeting after such change happened. It has been witnessed in the case of Smt. Sandeep Kaur Ahluwalia vs. Mukat Pipes Ltd. and Ors. where the honourable court held that the provisions of the Act cannot applied if there is no personal interest of the director. Not only this, it is also the duty of director to not involved in such contract or arrangement in which he/she has the personal interest and if after the entering into contract by company, the director found out that he/she has certain kind of interest then it is his/her duty to disclose this
