Every company is statutorily required under the Companies Act, 1956
to keep and maintain such books as are necessary to give a true and fair view of the state of affairs of the company. The Act provides that a company shall keep proper book of accounts in respect of the following:-
- All sales and purchases of goods by the company
- All sums of money received and expended by the company and the matters in respect of which these have taken place
- The assets and liabilities of the company
- In case of companies which are engaged in production,manufacturing,mining or processing activities, particulars related to utilisation of material or labour or other items of cost as prescribed by Central Government.
Provisions relating to Books of Accounts under the Companies Act (Section 209)
- All books of accounts shall be kept at the registered office of the company. But if they are kept at any other place in India as decided by the Board of Directors, the company shall send a notice in writing ( Form 23AA) to the Registrar of that place, mentioning the full address of the place. Such notice shall be filed within seven days of choosing that place. If a company has a branch office, proper books of accounts related to the branch business must be maintained at that office. But, summarized returns of these books shall be sent by the branch to the registered office every three months.
- The books of accounts together with the vouchers, invoices and other connected documents or records shall be preserved in good order for a period of 8 years (or the entire period, if the company is less than 8 years old).
- The books of accounts must be maintained on accrual basis and according to the double-entry system of accounting. The books cannot be maintained on the cash basis.
- The primary responsibility for making proper books of accounts of a company is that of the managing director or finance manager and all officers and other employees who have been authorised to maintain the books by the Board of Directors. But,if the company has neither a managing director nor manager,then every director of the company shall have the responsibility.
- If any company or any person who is responsible for maintaining proper books of accounts fails to take the required steps, it is liable to penalty of imprisonment or fine.
- The Act provides for the inspection of the books of accounts by the Registrar or by any officer authorised by Government to do so. The inspection may be conducted without giving prior notice to the company. It is the duty of the directors or officers of the company to provide all necessary support to the inspection officers in terms of books of accounts, other books, papers of the company and any other matter. Any default in this regard is a punishable offence. Broadly, the inspections are undertaken to serve one or more of the following objectives:-
- To ensure compliance of various provisions of the Companies Act, 1956 and also to keep a watch on the performance/efficiency of the companies
- To ensure that the company has not falsified its books of accounts or the company’s funds have not been misappropriated or the management has not misused its fiduciary position for any personal advantage
- To see whether any unfair practices prejudicial to the public interest are being resorted to by any company
- To examine whether the companies are managed on sound business principles or whether there are acts of mismanagement which may ultimately affect the interests of shareholders, creditors, employees, consumers and the general public and
- To see whether statutory auditors have carried out their duties properly while certifying true and fair view of the State of affairs of the company
Provisions relating to the Auditors in the Companies Act (Section 224 to 233)
- Audit is the process of checking accounting entries as per norms and guideline by the accounting professionals. The Companies Act,1956 provides for compulsory appointment of an independent person as the 'auditor' of the company whose responsibility is to examine the affairs of the company and to report it to the shareholders. The Act also contains provisions relating to appointment, removal, duties,etc of a company auditor.
- An Auditor occupies a very important position and has been assigned several duties:-
- He shall submit 'Auditors Report' to the members stating that:-
- Whether he has obtained all informations and explanations which are necessary for the purpose of audit;
- Whether in his opinion proper books of accounts, as required by law, have been kept by the company;
- Whether the company's balance sheet and profit and loss account are in agreement with the books, accounts and returns;
- Whether the profit and loss account and balance sheet comply with the accounting standards.
- He should check not only the arithmetical accuracy of books of accounts but also ensure that they show the true financial position of the company.
- He is required to enquire into the following matters:-
- Whether loans and advances made by the company have been shown as deposits and have been made on the basis of proper security;
- Whether personal expenses have been charged to revenue account;
- Whether transactions represented merely by book entries are not prejudicial to the interest of the company;
- Whether cash has actually been received in respect of the shares that have been allotted for cash,and if no cash has been received, whether the position shown in the books and balance is correct,regular and not misleading.
- He also has the duty to assist the inspector in his investigation by producing all books and papers of the company which are in his custody or power.
- Where 'special audit' has been ordered by the Central Government, he shall make his report to the Government.
- The first auditors of a company are appointed by the Board of Directors within one month of incorporation. The auditors so appointed shall hold office until the conclusion of the first Annual General Meeting. They may, however, be removed before the expiry of their term and another person appointed in their place. Subsequent auditors are appointed every year by the shareholders in the Annual General Meeting by passing an ordinary resolution. The auditors so appointed shall hold office until the conclusion of the next Annual General Meeting.
- The Central Government is empowered to appoint auditors in the following cases:-
- Where no auditors have been appointed at the Annual General Meeting, the company shall intimate the fact to the Central Government within 7 days of the meeting, and thereupon the Central Government will make the appointment.
- Where the company was responsible for making the appointments of auditors by passing a special resolution, but the company has failed to do so.
- Appointment of auditors of a government company is made by the Central Government on the advice of Comptroller and Auditor General of India. There is a special arrangement for the audit of companies where the equity participation by Government is 51 percent or more. The primary auditors of these companies are Chartered Accountants, appointed by the Union Government on the advice of the Comptroller & Auditor General, who gives the auditors directions on the manner in which the audit should be conducted by them. He is also empowered to comment upon the audit reports of the primary auditors. In addition, he conducts a supplementary audit of such companies and reports the results of his audit to Parliament and State Legislatures.
- A person can be appointed an auditor only if he is a 'chartered accountant' within the meaning of Charted Accountants Act, 1949. Only a practicing chartered accountant can be appointed an auditor of a company. None of the following can be appointed as an auditor of a company :-
- A body corporate;
- An officer or employee of the company;
- Partner of the company;
- Person holding securities carrying voting rights of the company;
- Person who is indebted to the company.
- Under the companies Act, an auditor enjoys the following powers:-
- The auditor shall have access at all times to the books of accounts and vouchers of the company.
- He may obtain from the officers of the company such information and explanations as he may consider necessary.
- If the branch accounts have been audited by a person other than the company's auditors, the latter shall have a right to visit the branch office and have access to all books of accounts, etc, if he considers it necessary for the performance of his duties.
- He has the right to receive notice of and to attend General Meeting.
- He has the right to recover remuneration for auditing the accounts of the company.
- He also has the right to seek expert opinion from bankers, lawyers, engineers, etc.
- The Central Government has the power to direct special audit of a company's accounts in the following cases:-
- Where the affairs of any company are not being managed in accordance with sound business principles, or prudent commercial practices, or
- Where the company is being managed in a manner which is likely to cause serious injury or damage to the interest of the trade, industry or business to which it pertains, or
- Where the financial position of any company is such as to endanger its solvency.
The Central Government may appoint a chartered accountant or the auditor of the company itself to conduct the special audit. Though his powers and duties shall be similar to that of an auditor of a company, but he must submit his report to the Central Government. On receipt of the report, the Central Government may take such action on the report as it considers necessary. If no action is contemplated, then it must send a copy of the report with its comments to the company for circulation among members or for reading at the next Annual General Meeting. The expenses of audit, as determined by the Central Government, shall be borne by the company.