[Opinion] Consequences of failing to address auditor’s observations in the Board’s Report

  • Blog|News|Company Law|
  • 3 Min Read
  • By Taxmann
  • |
  • Last Updated on 27 December, 2022

auditor’s observations

[2022] 145 taxmann.com 564 (Article)

1. Board report

Board’s Report is an important document prepared by the company every year and attached along with the financial statements and discloses the details of the company’s affairs as to what happened during the financial year that has ended, to its stakeholders.

2. The provision governing the board report

Section 134 of the Companies Act, 2013 read with Companies (Accounts) Rules, 2014, are the governing regulations which spell out the various requirements of the Board Report.

3. Contents to be disclosed in the board report

Sub-section (3) of section 134 of the Companies Act, 2013 read with Companies (Accounts) Rules, 2014, lists the requirements of various disclosures such as financial highlights of the company relating to transfer to reserve, dividend etc., details of subsidiary if any, the number of the board meeting held, key managerial personnel and directors details, directors responsibility statement, the composition of the audit committee and adequacy of internal financials controls, particulars relating to a loan, investment, guarantee and securities and contracts or arrangements with related parties, auditor and auditors report (statutory auditor, cost auditor and secretarial auditor), significant events and material orders passed by the regulators or courts, corporate social responsibilities related matters if applicable and such other matters.

As per the provisions of sub-section (3) (f) of section 134 of the Companies Act, 2013, the section states that there shall be attached to a statement laid before a company’s annual general meeting, a report by the company’s board of directors, which shall include explanations or comments by the board on every qualification, reservation or adverse remark or disclaimer made (i) by the auditor in his report and (ii) by the company secretary in practice in his secretarial audit report.

4. Consequences of not providing any explanation for the observations of the auditors

As stated above, the board report is mandatorily required to provide as per the provisions of sub-section (3) (f) of section 134 of the Companies Act, 2013, required, necessary explanations or comments on every qualification, reservation or adverse remark or disclaimer made by the statutory auditor in his audit report and by the company secretary in practice in his secretarial audit report. By not offering / providing any explanations to the auditors qualifications, observations etc., would amount to a violation of the provisions of section 134(3)(f) of the Companies Act 2013.

5. Default committed (if any) by the company

If the company fails to make the required explanation and comments on the auditors’ qualifications, comments, and observations, in the board report i.e. if a company is in default in complying with the provisions of this particular section (i.e.134), the company shall be liable to a penalty of three lakh rupees and every officer of the company who is in default shall be liable to a penalty of fifty thousand rupees.

6. Consequences of any default

To understand the consequences of any default while complying with section 134 (3) (f) of the Companies Act 2013 i.e. not providing the required explanations or comments for the auditor’s disqualifications, comments and 0bserversations if any, let us go through the decided case law by the Registrar of Companies, Chennai on this matter on 10th October 2022.

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