[Opinion] ROC Penalizes Auditors for Old Uncommented Audit Report Under Companies Act, 1956, Citing Company’s Non-Disclosures

Prof R Balakrishnan – [2024] 167 taxmann.com 589 (Article)

Background of the case

This is a classic case pertaining to the auditor’s report issued in respect of a company known as M/s. s Karam Chand Thapar & Bros. (Coal Sales) Limited situated at Kolkata, under the erstwhile Companies Act 1956, during the financial years 2006-07, 2007-08 and 2008-09 wherein the statutory auditors failed to bring out the non-compliance of mandated disclosures required in the financial statements envisaged under the provisions of the Companies Act 1956 read with Schedule VI and various non-compliances that were applicable under the Accounting Standards – 6, 7, 9, 10 and 18. The Registrar of Companies of Kolkata, during enquiry with the company, observed the above non-compliances committed by the auditors of the company and issued an adjudication notice to the auditor’s company pursuant to section 227 (2) read with 211(1) & 2 of the Companies Act 1956 read with Schedule VI read with the applicable Accounting Standards and subsequently filed a criminal complaint against the auditors for the violations committed by them under the erstwhile Companies Act 1956 with the Metropolitan Magistrate Court at Kolkata.

In November 2018, the Ministry of Corporate Affairs issued a notification by which the violation relating to section 227 of the Companies Act 1956 – corresponding to section 143 of the Companies Act 2013 had been decriminalised. The matter would be considered for adjudicating the penalty through in house adjudication penalty mechanism (IAM) under the Companies Act 2013 and the auditor was liable for penal action under the provisions of section 450 of the Companies Act 2013. With the above regulatory changes in the Act, the criminal complaints were transferred to the Adjudicating Officer of Kolkata for adjudication through the in-house adjudication penalty mechanism as per the provisions of the Companies Act 2013. In the meantime, one of the auditors expired, and the Court relieved the demised auditors from the charges on account of his death. The statutory auditor who issued the audit report for the financial year 2008-09 filed a suo-moto application for adjudication for the violations committed and prayed the Registrar of Companies to consider the adjudication application leniently, giving the justifications for issuing the uncommented audit report. The Registrar of Companies/Adjudication officer, after following the due procedure of the law, came to a conclusion that the statutory auditor had violated the provisions of section 227 (2) read with 211(1) & 2 of the Companies Act 1956 which corresponds to section 143 of the Companies Act 2013 and accordingly issued the adjudication order dated 8th November 2023 and imposed penalties amounting to Rs. 1.40 lakh under section 454(3) of the Companies Act 2013 upon the auditor.

The order issued by the Registrar of Companies/Adjudication Officer provides insights into the violations, the adjudication process, and the penalties imposed, offering a comprehensive understanding of regulatory consequences in corporate governance and let us go through the same in order to know the details of the case in threadbare. It is also interesting to note that the offences committed under the erstwhile Companies Act 1956 were pending disposal almost for a period of 15 years, and the same was taken up now, and the adjudication process carried out under the current provisions of the Companies Act 2013. The penalty provided in the erstwhile 1956 Companies Act remained the same in the existing Companies Act 2013 also for this default. (in the 1956 Act, section 233 was the section for a penalty for non-compliance by auditors with sections 227 and 229, and in the current Companies Act 2013, the relevant section corresponding to the above in section 450 of the Act.)

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