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Corporate Sep 10, 2013

Companies Bill: Draft rules clear on rotation of auditors but not on their eligibility

The draft rules released by the government for the new companies legislation provideclarifications on rotation of auditors but ambiguity persistson eligibility and appointment of internal auditors, sayexperts.

Government on Monday issued the first tranche of draft rules,covering 16 chapters of the Companies Act, 2013, whichoverhauls regulations that govern corporates in the country.

"The rules provide many clarifications with respect torotation of auditors.

"The five-year period for rotation in the case of anindividual and ten-year period in the case of a firm will becalculated retrospectively and will include holding office asauditor prior to the commencement of the Act," Dolphy D'souza,National Leader and Partner in a member firm of Ernst & YoungGlobal said.

Corporate Affairs Minister Sachin Pilot. Reuters

Corporate Affairs Minister Sachin Pilot. Reuters

"Auditor rotation rules have been prescribed but do notseem to consider size of companies based on turnover or anymeasure of Profit & Loss account but on basis of balance sheetitems.

"The rules do not contain any relaxation from preparationof consolidated financial statements for intermediary holdingcompanies," Deloitte India Chairman P R Ramesh said.

The first set covers rules governing new norms for theboard of directors, auditors, registration and incorporationof companies, revival of sick companies, financial accounts ofcorporates, foreign incorporated companies and NationalCompany Law Tribunal and Appellate Tribunal, among others.

"While the draft rules have settled the question withregard to the companies which would necessarily require aninternal audit, ambiguity still persists on eligibility andappointment of internal auditors," PwC India's Risk AdvisoryServices Leader Satyavati Berera said.As per the Act, the internal auditor can be a chartered
accountant, cost accountant or other board nominatedprofessional.

Meanwhile, D'Souza said there has been some breather interms of reporting on fraud by auditors to the centralgovernment.The reporting is required to be made within 30 days, butonly with regards to material fraud.

"Materiality shall mean frauds that are happeningfrequently or frauds where the amount involved or likely to beinvolved is not less than 5 per cent of net profit or 2 percent of turnover of the company for the preceding financialyear," he noted.

With the new rules in place,, India Inc will also have to put the income from ongoing CSR activities into its corporate social responsibility (CSR) fund in addition to the 2% of net profits of the preceeding three years.

PTI


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