[Opinion] ROC Penalizes Co., WTD, CFO & CS for Failing to Address Audit Objections on Internal Financial Controls in Board Report

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  • Last Updated on 29 November, 2024

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Audit Objections on Internal Financial Controls

Prof R Balakrishnan – [2024] 168 taxmann.com 612 (Article)

1. Background of the Case

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

  • by the auditor in his report and
  • by the company secretary in practice in his secretarial audit report.

In this case, a company named M/s. Spacenet Enterprises India Limited from the state of Telangana Directors failed to address an audit objection regarding internal financial controls in their Board’s Report for the financial year 2020-2021, which was discovered by the inspecting officials from the office of the Registrar of Companies. This being the violation of the Companies Act, the Registrar of Companies, Hyderabad of Telangana, issued an adjudication order against M/s. Spacenet Enterprises India Limited for violating Section 134(3)(f) of the Companies Act, 2013, after following the required procedure on this matter.

Though the company attributed this omission to oversight, which led to the issuance of an adjudication notice following a personal hearing, the Registrar of Companies, after evaluating the case, imposed penalties upon the company Rs. 3,00,000 and Rs. 50,000 each on the officers in default – i.e. whole-time director, chief financial officer and upon the company secretary. Let us go through this case in detail so that we can understand the facts and circumstances that led to the violation and the consequent action by the regulators to address the violation.

2. Relevant Provision Relating to this Case under the Companies Act 2013

The relevant provisions pertaining to this case are spelt out in chapter IX of the Companies Act 2013, under the headings accounts of companies under the provisions of section 134 of the Act pertaining to financial statements, board reports etc. The relevant extracts of these sections and rules are as given below for ready reference.
Companies Act 2013
Chapter IX – Accounts of Companies
Section 134. Financial statement, Board’s report, etc.
Section Provision
134 (3) There shall be attached to statements laid before a company in general meeting, a report by its Board of Directors, which shall include,
134 (3)(f) explanations or comments by the Board on every qualification, reservation or adverse remark or disclaimer made—
134 (3)(f) (i) by the auditor in his report and
134 (3) (f) (ii) by the company secretary in practice in his secretarial audit report
Penal section for non-compliance/default if any
134 (8) If a company is in default in complying the provisions of this section, the company shall be liable to a penalty of three lakh rupees and every officer who is in default shall be liable to a penalty of fifty thousand rupees.

3. Consequences of Default/Violation

To understand the consequences of any default/non-compliance while complying with the

provisions of section 134 (3) (f) of the Companies Act 2013 relating to financial statements, board reports, etc. – especially with reference to offering explanations and comments to be provided by the board of directors in the board report on the qualification made by the statutory auditors in his report, let us go through the decided case law by the Registrar of Companies of

Telangana on this matter on 16th July 2024 relating to M/s. Spacenet Enterprises India Limited.

Disclaimer: The content/information published on the website is only for general information of the user and shall not be construed as legal advice. While the Taxmann has exercised reasonable efforts to ensure the veracity of information/content published, Taxmann shall be under no liability in any manner whatsoever for incorrect information, if any.

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