Role of Accounts and Audit in Business Growth and Success

Accounts and audit play a crucial role in the growth and success of a business by ensuring proper financial management, transparency, and accountability. Accounting involves the systematic recording and reporting of financial transactions, which helps management understand the financial position of the business, control costs, and make informed decisions for future planning. Audit, on the other hand, involves an independent examination of financial records to verify their accuracy and reliability, ensuring that financial statements present a true and fair view. Together, accounts and audit help maintain stakeholder confidence, ensure compliance with laws and regulations, prevent financial irregularities, and support sustainable business growth.

Table of Contents

1. Books of Account Required to be Kept
2. Inspection of Books of Account
3. Persons Responsible for Keeping Proper Books of Account [Vide Sub-section (6) of Section 128]
4. Financial Statements
5. Authentication of Accounts
6. Board’s Report

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1. Books of Account Required to be Kept¹

Section 128 of the Companies Act, 2013 requires every company to maintain at its registered office books of account and other relevant books and papers and financial statements for every financial year which give a true and fair view of the state of affair of the company including that of its branch office or offices. As per Section 2(13) the books of account includes records maintained with respect to:

(a) all sums of money received and expended by the company and the matters in respect of which receipts and expenditure take place;

(b) all sales and purchases of goods by the company;

(c) the assets and liabilities of the company; and

(d) the items of cost as may be prescribed under section 148 in the case of a company which belongs to any class of companies specified under that section;

As noted in the preceding paragraph, Section 128 requires books of account to be kept at the registered office of the company. However, the proviso to Section 128(1) allows the company to keep its books of account or any of them at any other place in India as the Board of directors may decide. In such a case, the company is required to file with the Registrar a notice in writing giving the full address of that other place within seven days. In respect of a branch office in India or outside India, Section 128 (2) allows the books of account relating to the transactions effected at the branch office to be kept at that office. However proper summarised returns periodically are required to be sent by the branch office to the company at its registered office or the other place referred to in Section 128(1).

The proviso to Section 128(1) also permits the company to maintain the books of account and other relevant papers in an electronic mode. If the books of account are maintained in the electronic mode, the Rule 3 of the Companies (Accounts) Rules, 2014 requires that such books of account and records to remain accessible in India, at all times for being usable subsequently. Such books and records must be maintained in the format in which they were originally generated, sent or received. Likewise the information received from the branch office need to be kept without alternation and must depict information originally received from the branches. The company needs to have proper system of storage, retrieval, display or printout as considered appropriate by the Audit Committee or the Board. In respect of books and records maintained in the electronic form including at a place outside India, daily back up shall be kept in servers physically located in India. If the company is using the services of a third party service provider for maintaining the books and records in the electronic format, company shall intimate to the Registrar the name of the service provider, internet protocol address and location of the service provider. If the service provider is located outside India, the name and address of the person in control of the books of account and other books and papers in India also needs to be intimated. This information needs to be furnished annually at the time of filing of the financial statements.

With effect from the financial year commencing on or after April 2021, the accounting software used by the company to maintain the books of account must have the features of recording audit trail of each transaction and creating an edit log of each change made in the books of account alongwith the dates when such changes were made. Moreover, the software must not permit disabling of the audit trail.* The accounting software need to keep audit trail, log of all changes made and not permit disabling of the audit trail.

Section 338(2) provides (taken in positive terms) that proper books of account constitute such books of account as are necessary to exhibit and explain the transactions and financial position of the business of the company, including books containing sufficiently detailed entries of daily cash receipts and payments. Also, where the business of the company has involved dealings in goods, statements of the annual stock takings (except in the case of goods sold by way of ordinary retail trade) and of all goods sold and purchased, showing the goods and the buyers and sellers thereof in sufficient detail to enable these goods and these buyers and sellers to be identified should also be maintained. Though section 338 relates to a situation involving winding up of a company, it has the special effect of further amplifying the requirements as regards maintenance of books of account and should be taken as a general requirement from the standpoint of the company. In other words, its application should not be taken as confined to winding-up process only.

Proper Books of Account – Section 2(13) and Section 128(1) read with section 338(2) of the Act provides for the maintenance of proper books of account and they obviously include the cost accounting records [section 2(13)(d)] and stock records [section 338(2)], apart from normal books of account. As per Section 148(1) of the Act the Central Government may order that companies engaged in production of such goods or providing such services as may be prescribed to maintain detailed cost records including utilisation of material or labour or other items of cost in the manner specified by the Central Government. The Central Government had ordered maintenance of Cost Records for different types of Industries. Proper maintenance of stock records is also a necessity as in the absence of proper stock record the true and fairness of the annual statements of account cannot be properly understood. The Institute of Chartered Accountants of India (ICAI) had in the Compendium of Guidance Notes², casts the duty on the statutory auditor to examine the cost records maintained, as the cost records form a part of the “proper books of account” within the meaning the Act.

2. Inspection of Books of Account³

Section 128(3) provides that books of account and other books and papers shall be open to inspection by any director during business hours. However inspection in respect of the subsidiary company is permitted only by a person duly authorised by the Board of Directors by passing a resolution in this regard.

Further, section 206(1) provides that the Registrar by a written notice may call on the company to produce the books of account, books, papers and explanations as may be required. Before serving any notice under Section 206, the Registrar shall record his reasons in writing for issuing such notice. Likewise, if the circumstances so warrant, the Central Government under section 206(5) of the Act may appoint an inspector for carrying out an inspection of books and papers of a company. If the Registrar or inspector so appointed by the Central Government calls for the books of account and other books and papers as aforesaid, the directors, officers and employees of the company are duty bound to produce all such documents and other statements, information and explanations as may be needed for the purpose of such inspection. The Registrar or inspector making the inspection under section 206, may make or cause to be made copies of books and account and other books and papers or place or cause to be placed any marks of identification on the books of account or other books and papers as token of inspection having been made.

Penalty under Section 207(4) – Sub-section (1) of section 207 casts a duty on every director or other officer or employee of the company to produce to the person making inspection all such books of account and other books and papers of the company in his custody/control and to furnish him with any statement, information or explanation as may be required by that person, within such time and at such place as he may specify. Also, it is the duty of every director, other officer or employee of the company to assist the person in the inspection as it may be reasonable to expect from the company. Where default has been made in the above matter, every officer of the company, including a director who is in default, shall be punishable with fine which shall not be less than rupees twenty five thousand but which may extend to rupees one lakh and also with imprisonment for a term which may extend to one year. Further, the director or the officer, if convicted, shall, on and from the date of conviction, be deemed to have vacated his office as such and also shall be disqualified for holding such office in any company. In respect of directors, this vacation of office is in addition to the grounds mentioned in section 167 of the Act. This disqualification extends to private companies as well.

3. Persons Responsible for Keeping Proper Books of Account [Vide Sub-section (6) of Section 128]

The managing director, the whole-time director in charge of finance, the Chief Financial Officer or any other person of a company who has been given the responsibility of keeping proper books of account and other matters enumerated under section 128 shall be held responsible for keeping proper books of account.

Punishment for Default – In case of contravention, the person so responsible shall be punishable with fine which shall not be less than rupees fifty thousand and may extend to rupees five lakhs.* There is no provision in the Act to prosecute the company concerned. Only the functionaries identified in these sections who alone can be charged and prosecuted – Sanjay Suri v. State [2010] 102 SCL 1 (Delhi).

Proper Books of Account in Relation to the Branch of a Company – Section 128(2) states that where a company has a branch office, whether in or outside India, the company shall be deemed to have complied with the provisions of section 128(1), if proper books of account relating to the transactions effected at the branch office are kept at that office and proper summarised returns, made up to date, at intervals of not more than three months, are sent by the branch office to the registered office of the company or at such other address where the books of account are kept by fulfilling the requirements mentioned earlier. This requirement is specific that a foreign branch has also to maintain proper books of account as required by section 128(1) of the Act, irrespective of the requirement, if any, in the country where the branch is located.

Period for Which Books of Account to be Retained – Section 128(5) specifies that the books of account of every company relating to the period of not less than eight years immediately preceding the current year shall be preserved in good order along with the relevant vouchers. Where a company has not been in existence for eight years, the books of account and related vouchers should be preserved in good order right from the first accounting year of the company.

4. Financial Statements

Section 129 (1) of the Act requires every company to prepare its financial statements at the end of the ‘financial year’ so as to give a true and fair view of the state of affairs of the company. Such statements shall comply with the accounting standards notified under section 133 of the Act in the format prescribed in Schedule III. Section 2(40) of the Act has given an inclusive definition of the expression ‘financial statements’. The financial statements accordingly include:

(i) a balance sheet as at the end of the financial year;

(ii) a profit and loss account,

(iii) cash flow statement for the financial year;

(iv) a statement of changes in equity, if applicable; and

(v) any explanatory note annexed to, or forming part of, any document referred to in sub-clause

The expression financial statements include explanatory statements and wherever there is a requirement to submit financial statements it includes explanatory notes. The explanatory notes of account form integral part of the balance sheet and are essential for understanding the balance sheet. [State of Bihar v. Ziqitza Health Care Ltd. [2024] 161 taxmann.com 723 (SC)]

In case of company not carrying on business for profit, it will prepare ‘Income & Expenditure Account’ instead of Profit and Loss account. With respect to One Person Company, small company and dormant company, the cash flow statement need not be prepared.

The financial statement for the financial year are required to be presented by the Board of Directors before the annual general meeting (AGM) of members [Section 129(2)]. As the AGM is required to take place within six months of close of the financial year under Section 96(1), it means that the financial statements must be ready within six months of the close of the financial year.

The financial statements are required to be prepared for each financial year. Section 2(41) of the Act defines the ‘financial year’ in relation to a company as the period ending on the 31st day of March every year. In case of a new company incorporated on or after 1st day of January of a year, the financial year will end on the 31st day of March of the following year. The Act provides for a uniform financial year ending on 31st day of March. The first financial year of a company may be shorter or longer than 12 months. The first financial year for a company incorporated between 1st January and 31st March would be longer than 12 months whereas for other companies it would be shorter than 12 months.

A company which is either a holding or a subsidiary of a company incorporated outside India and which is required to follow a different financial year for consolidation of its accounts may follow a different period as financial year. For this purpose the application needs to be made to the Central Government. Prior to the Companies (Amendment) Act, 2019, the application was to be made to the Tribunal.

Prior to the commencement of the Act, many companies were following accounting period different than that ending on 31st March. Such companies have been permitted a period of two years from the commencement of the Act to align their financial year as prescribed by the Act [proviso to Section 2(41)]. During this period of alignment such companies would have at least one financial year which is either longer or shorter than twelve months.

The Income-tax Act, 1961 already requires that all companies must submit their income-tax returns on the basis of ‘Uniform Financial Year’ closing on 31st March every year. A uniform financial year under the companies act would obviate the need for maintaining separate accounts for income-tax purposes.

4.1 Preparation and Presentation of Financial Statements

Section 129 along with Schedule III* to the Act deals with the preparation and presentation of balance sheet and the statement of profit and loss of a company. This section requires that the financial statements shall give a true and fair view of the state of affairs of the company. The balance sheet should be in the form set out in Part I of Schedule III and the statement of profit and loss should be in form set out in Part II of Schedule III. Any reference to the financial statement under this section shall include any notes annexed to or forming part of such financial statement, giving information required to be given and allowed to be given in the form of such notes under this Act (Explanation to Section 129).

Schedule III* of the Act prescribes the form in which the balance sheet, the statement of profit and loss and consolidated financial statements should be prepared. Schedule III have been divided into two parts. Division-I contains the formats of financial statements and general instructions for preparation of financial statements for companies which are required to comply with the existing accounting standards. Division II prescribes the formats and general instructions for preparation of financial statements for companies which are required to comply with the revised Indian Accounting Standards (Ind AS) compliant with the International Financial Reporting Standards.

The balance sheet and the statement of profit and loss of a company shall not be treated as not disclosing a true and fair view of the state of affairs of the company, merely by reason of the fact that they do not disclose:

(i) in the case of an insurance company, any matters which are not required to be disclosed by the Insurance Act, 1938 or the Insurance Regulatory and Development Authority Act, 1999;

(ii) in the case of a banking company, any matters which are not required to be disclosed by the Banking Companies Act, 1949;

(iii) in the case of a company engaged in the generation or supply of electricity, any matters which are not required to be disclosed under the Electricity Act, 2003;

(iv) in the case of a company governed by any other law for the time being in force, any matters which are not required to be disclosed by that special law. [proviso to Section 129(1)].

The above provisions are not applicable to an insurance or banking company or any company engaged in the generation or supply of electricity or any other class of companies for which a form of financial statements has been specified in or under the special law concurrently governing such company.

Exemption from Requirements of Schedule III – The Central Government may, by notification exempt in public interest, any class or classes of companies from compliance with any of the requirements of Section 129. Any such exemption may be granted either unconditionally or subject to such conditions as may be specified in the notification [Section 129(6)]. Such an exemption may be given the Central Government on its own or on an application made by a class or classes of companies.

Compliance with Accounting Standards – As per section 129(1) of the Act, items contained in the financial statements shall comply with the accounting standards notified under section 133. In respect of a government company engaged in defence production, Accounting Standard 17 (Segment Reporting) will not apply.** Where the financial statements of a company do not comply with the accounting standards, such company shall disclose in its financial statements the following:

(a) the deviation from the accounting standards;

(b) the reasons for such deviation; and

(c) the financial effect, if any, arising due to such deviation [Section 129(5)]. Additionally the Directors’ Responsibility Statement prepared under Section 134 of the Act shall state that the applicable accounting standards had been followed in the preparation of the financial statements giving proper explanation in case of material departures.

Until the accounting standards are notified by the Central Government under section 133 as aforesaid, the standards specified under the Companies Act, 1956 shall apply as the accounting standards.

Responsibility for Compliance – The managing director, the whole-time director in charge of finance, the Chief Financial Officer or any other person charged by the Board with the duty of complying with the requirements of this section and in the absence of any of the officers mentioned above, all the directors are deemed to be responsible for the compliance with the provisions of Section 129. As per Section 129(7) in case of contravention, those responsible shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than rupees fifty thousand but which may extend to rupees five lakh, or with both.

Preparation of Consolidated Financial Statements by the Holding Company* – Section 129(3) of the Act requires that where there is one or more subsidiary or associate companies of a company (i.e., the holding company), at the end of the financial year of the (holding) company, it shall prepare a consolidated financial statement of the company and of all the subsidiaries and associate companies. The consolidated financial statements shall be presented in the same form and manner as that of its own. The consolidated financial statements are also required to be laid before the annual general meeting of the company. In addition, a separate statement containing the salient features of the financial statement of the subsidiary or subsidiaries and associate companies shall also be presented.

4.2 Periodical Financial Results by Unlisted Companies

It may be noted that the listed companies are required to prepare and disseminate quarterly results in terms of the listing agreement with the stock exchange. There was no such requirement for unlisted companies. Section 129A, inserted vide the Companies (Amendment) Act, 2020, the Central Government is empowered to require such class or classes of unlisted companies to prepare the financial results periodically. The form and periodicity for preparing the periodic financial results as may be prescribed. The periodical results may also be subject to complete audit or limited review and would be approved by the Board of Directors. A copy of the periodical results needs to be filed with the Registrar within thirty days of completion of the relevant period.†

5. Authentication of Accounts

According to section 134(1), the financial statements of a company, including the consolidated financial statements, shall be approved by the Board of Directors. They are required to be signed on behalf of the Board of directors by the chairperson of the company where he is authorised by the Board or by two directors out of which one shall be the managing director and the Chief Executive Officer, if he is a director of the company. They are also required to be signed by the Chief Financial Officer and the company secretary of the company if appointed. In case of a banking company, the balance sheet and the profit and loss account shall be signed by the persons mentioned in clause (a) or clause (b) of section 29(2) of the Banking Regulation Act, 1949. In the case of One Person Company, they are required to be signed by only one director.

The financial statements of all companies shall be approved by the Board of directors before they are signed on behalf of the Board in accordance with the provisions of this section and before they are submitted to the auditors for their report thereon. Section 134 (2) further provides that auditors’ report shall be attached to every financial statement.

6. Board’s Report

Section 134(3) requires that there shall be attached to financial statements laid before a company in general meeting, a report by its Board of directors, with respect to the following:

(a) the web address, if any, where annual return referred to in sub-section (3) of section 92 has been placed;*

(b) number of meetings of the Board;

(c) Directors’ Responsibility Statement;

(ca) details in respect of frauds reported by auditors under sub-section (12) of section 143 other than those which are reportable to the Central Government.⁴

(d) a statement on declaration given by independent directors under sub-section (6) of section 149;

(e) in case of a company covered under sub-section (1) of section 178, company’s policy on directors’ appointment and remuneration including criteria for determining qualifications, positive attributes, independence of a director and other matters provided under sub-section (3) of section 178**;

(f) 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;

(g) particulars of loans, guarantees or investments under section 186;

(h) particulars of contracts or arrangements with related parties referred to in sub-section (1) of section 188 in the prescribed form;

(i) the state of the company’s affairs;

(j) the amounts, if any, which it proposes to carry to any reserves;

(k) the amount, if any, which it recommends should be paid by way of dividend;

(l) material changes and commitments, if any, affecting the financial position of the company which have occurred between the end of the financial year of the company to which the financial statements relate and the date of the report;

(m) the conservation of energy, technology absorption, foreign exchange earnings and outgo, in such manner as may be prescribed;

(n) a statement indicating development and implementation of a risk management policy for the company including identification therein of elements of risk, if any, which in the opinion of the Board may threaten the existence of the company;

(o) the details about the policy developed and implemented by the company on corporate social responsibility initiatives taken during the year;

(p) in case of a listed company and every other public company having such paid-up share capital as may be prescribed, a statement indicating the manner in which formal #annual evaluation of the performance of the Board, its Committees and of individual directors has been made*;

(q) such other matters as may be prescribed.

If the disclosure as required under section 134(3) has been made elsewhere in the financial statements, it would be sufficient to refer to such disclosure rather than repeating the same in the Board’s report. In case, the policies referred to in sub-clause (e) or (o) are available on the company’s website, only salient features and changes in the policy need to be mentioned in the Board’s report indicating the web-address where such policies are available. In case of One Person Company or small company, the Central Government may prescribe an abridged Boards’ report †

The Board’s Report shall be prepared using the financial statements of the company on a standalone basis. The performance and financial position of each of the subsidiaries, joint ventures companies and associates included in the consolidated financial statement shall be reported separately in the Board’s Report.

6.1 Directors’ Responsibility Statement

Clause (c) of Section 134(3) requires a Directors’ Responsibility Statement to be furnished as a part of the Directors’ Report. It reinforces the responsibility of the Board in laying down the internal controls, maintenance of accounting records and preparation of financial statements. The Directors’ Responsibility Statement accordingly states:

(a) Applicable accounting standards have been followed in the preparation of financial statements. In case of a deviation, proper explanation has been provided.

(b) Accounting policies have been selected by the Board and judgments and estimates have been made that are reasonable and prudent. The policies chosen have been applied consistently. The financial statements give a true and fair view of the state of affair of the company at the end of the financial year and the profit and loss of the company for that period.

(c) Proper and sufficient care has been taken for the maintenance of adequate accounting records to meet the requirements of the Act. The directors also take responsibility for safeguarding the assets of the company and for preventing and detecting frauds and other irregularities.

(d) The accounts have been prepared on a going concern basis.

(e) In the case of a listed company, adequate internal financial controls have been laid down and such controls are operating effectively.

(f) Proper systems have been laid down to ensure compliance with the provisions of all the applicable laws.

6.2 Additional Information under the Companies (Accounts) Rules, 2014

Rule 8(5) requires some additional information to be reported in the Board’ report as detailed below:

(i) the financial summary or highlights;

(ii) the change in the nature of business, if any;

(iii) the details of directors or key managerial personnel who were appointed or have resigned during the year;

(iiia) a statement regarding opinion of the Board with regard to integrity, expertise and experience (including the proficiency) of the independent directors appointed during the year. For this purpose, the expression “proficiency” is ascertained from the online proficiency self-assessment test conducted by the institute notified under sub-section (1) of section 150*.

(iv) the names of companies which have become or ceased to be its Subsidiaries, joint ventures or associate companies during the year;

(v) the details relating to deposits accepted during the year, remained unpaid or unclaimed as at the end of the year. If there has been any default in repayment of deposits or payment of interest thereon during the year and if so, number of such cases and the total amount involved;

(vi) Deposits which are not in compliance with the requirements of the Act need to be reported separately;

(vii) Any significant and material orders passed by the regulators or courts or tribunals impacting the going concern status and company’s operations in future;

(viii) Adequacy of internal financial controls with reference to the Financial Statements;

(ix) a disclosure, as to whether maintenance of cost records as specified by the Central Government under sub-section (1) of section 148 of the Companies Act, 2013, is required by the Company and accordingly such accounts and records are made and maintained;

(x) a statement that the company has complied with provisions relating to the constitution of Internal Complaints Committee under the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013 [14 of 2013]**.

(xi) the details of applications made or any proceedings pending under the Insolvency and Bankruptcy Code, 2016 during the year alogwith their status at the end of the financial year;

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1. For details see under ‘Register and Returns

*Inserted vide Notification No. G.S.R. 205(E) dated 24th March, 2021

2. Refer Compendium of Guidance Note, Vol. 1, 2nd Edition, Page 18-1, Issued by the ICAI.

3. For details see under ‘Register and Returns’.

*Amended vide the Companies (Amendment) Act, 2020, Notification dated 28 September 2020.

*Vide notification no. G.S.R. 404(E) [F. No.17/62/2015-CL-V], dated 6 April 2016

*The Schedule III has been further amended vide Notification No. G.S.R. 207 (E) dated 24 March, 2021.

**Amended vide Notification No. F.No. 1/2/2014-CL.V, dated 5 June 2015.

* Amended vide the Companies (Amendment) Act, 2017.

†Inserted vide the Companies (Amendment) Act, 2020, Notification dated 28 September 2020.

* Amended vide the Companies (Amendment) Act, 2017.

4. Inserted vide the Companies (Amendment) Act, 2015.

**Sub-clause (e) above shall not apply to the government companies. (Amended vide Notification No. F. No. 1/2/2014-CL.V dated 5 June 2015).

#Amended vide the Companies (Amendment) Act, 2017.

*Sub-clause (p) shall also not apply to a government company if the directors are evaluated by the Ministry or Department of the Central Government or State Government as per its own evaluation methodology. (Amended vide Notification No. F. No. 1/2/2014-CL.V dated 5 June 2015).

†Inserted vide the Companies (Amendment) Act, 2017.

*Inserted vide Notification G.S.R. 803(E) dated 22 October 2019.

**Amended vide Notification G.S.R 725(E) dated 31st July 2018.

***(xi) and (xii) Inserted vide Notification No. G.S.R. 205(E) dated 24th March, 2021.