Tag: audit committee

Big update! NFRA Plans to Scrutinize Auditors, Including Big Four, for Non-Audit Services

The National Financial Reporting Authority (NFRA) plans to scrutinize auditors, including the Big Four, for providing “non-audit services” to the same clients they audit. This move may spark controversy as it challenges the existing norms set by the Institute of Chartered Accountants of India (ICAI). While the auditors are bound by the ICAI’s code of ethics, the prohibition on non-audit work is not clearly defined. Although Section 144 of the Companies Act 2013 restricts certain services, there are still many services that auditors can offer to their clients.

The NFRA aims to regulate services beyond those listed in Section 144 and may extend the prohibition to any other services as prescribed. Audit firms, especially the Big Four, tend to avoid providing non-audit services to listed entities to uphold their reputation, but they are less cautious with unlisted firms.

This regulatory move is perceived as potentially burdensome and going beyond internationally accepted practices by some industry experts. Non-audit services are often lucrative for audit firms, unlike the auditing process itself.

The ICAI’s guidance note emphasizes that independence is a subjective matter for auditors. NFRA’s focus on non-audit work is evident from its inspection reports and actions against auditors involved in professional misconduct.

Government is set to make it obligatory for them to file annual transparency reports

Bringing more transparency in the functioning of auditors of large listed firms, the government is set to make it obligatory for them to file annual transparency reports. The National Financial Reporting Authority (NFRA), which had earlier floated a draft paper for suggestions, is expected to make a formal announcement on it shortly, mandating auditors of large listed firms to file these reports, starting from the current fiscal.

“The objective of the annual transparency report is to ensure better governance of auditors. The public comments have come in and it is likely that the NFRA will start implementing this requirement at the earliest,” said a person familiar with the development.

The NFRA, which is the regulator of the auditing profession and accounting standards, published draft requirements for preparation of these ATRs in January this year. The deadline for submission of comments was initially kept as February 16, but was later extended to February 24.

The NFRA is understood to have examined the comments and it is unlikely that there will be a significant change in the ATR framework. The only concern is whether firms would be able to compile the reports from this fiscal year, as the draft had proposed that each firm should publish it within three months of the end of a financial year. “There could be some teething troubles as it would be the first year of implementation,” noted another source.

According to the draft, the requirement of an ATR would be implemented in a gradual manner across the audit profession, engaged in the audit of public interest entities falling within the purview of the NFRA, starting with the auditors and audit firms performing the audit of the top 1,000 listed companies (by market capitalisation) from the financial year ending March 31, 2023.

The ATR would provide a detailed description of the statutory auditors, details about any collaborations, working alliances and membership of any international network, information on their revenue, apart from audit and non-audit services provided by them, as well as details about internal governance systems. Audit firms would have to first submit it to the NFRA and then publish it on their websites.

All about Related Party Transactions – Part 4 (Disclosures, Audit Committee, Registers, Meeting notices, Penalties)

Disclosures

Companies Act 2013

Specified Transactions – Non Arm’s Length transactions & Material Arm’s Length transactions

To be reported vide Form AOC-2

LODR

Half yearly on consolidated basis

AS/Ind AS

All transactions

Audit Committee

  • Approval or any subsequent modification of RPTs
  • In case of RPTs other than those referred to in Sec 188, Audit Committee doesn’t approve but shall make its recommendations to the Board
  • For transactions referred to in Sec 188, Audit Committee may make Omnibus approval, after Board’s approval & subject to criteria specified by the rules.
  • Omnibus Approval means specifying :-
  1. Name of the RP
  2. Nature and duration of the transaction
  3. Maximum amount of transaction
  4. the indicative base price or current contracted price and the formula for variation in the price, if any
  5. Any other relevant information
  • Omnibus approval shall be valid for a period not exceeding one financial year
  • Omnibus approval shall not be made for transactions in respect of selling or disposing of the undertaking of the company

Independent Directors

Schedule IV – Duties of Independent Directors – Para 9

States that Independent Directors should “pay sufficient attention and ensure that adequate deliberations are held before approving related party transactions and assure themselves that the same are in the interest of the company”

Notice & Agenda

The notice of the meeting in which approval shall be granted should contain Board’s agenda which contains the following items:

  1. Name of the related party
  2. Nature of relationship
  3. Nature, duration & particulars of the transaction
  4. Advance paid or received
  5. Manner of determining the pricing
  6. Other commercial terms

Along with the notice, an explanatory statement should also be sent to the parties entitled to the notice of the meeting which shall include the following:

  1. Name of the related party
  2. Name of related Director, KMP
  3. Nature of relationship
  4. Nature of transaction
  5. Material terms
  6. Monetary value
  7. Particulars
  8. Other material information

Register

Form

  • Form MBP-4 – all contracts or arrangements to which section 188 applies
  • Once the entry is made – Authenticated by CS
  • Placed before the next meeting of the Board – to be signed by all directors

Inspection

  • Open for Inspection – Extracts/Copies may be given – within 7 days – Max fee Rs. 10 per page
  • Open for inspection at AGM also

Exemptions

  • For the sale, purchase or supply of any goods, materials or services if value < 5 lakh/year
  • By a Banking company – for the collection of bills – in the ordinary course of its business

Penal Provisions

Director/Any employee – entered into or authorized the contract or arrangement – in violation of the provisions of the Act

Listed Company – Rs. 25 Lakhs

Unlisted Company – Rs. 5 Lakhs

 

All about Related Party Transactions – Part 3 (Voting and Approval))

Voting (Sec 188, Sec 184)

The basic question anyone can raise now is that “Can a Related party vote?”

If yes, in what circumstances?

Listed Companies –

RPs can’t vote (whether party to transaction or not)

All Material RPTs shall require approval of the shareholders through a resolution (Regulation 23)

Unlisted Public Companies –

If Promoters (incl. their relatives) holds >90%, then RPs can vote on the resolution

In other cases, RPs can only vote if they are not parties to the transaction proposed in the resolution

Private Companies –

Exempted i.e. any RP can vote on any Resolution (vide MCA notification dated 5th June,2015)

The above exemption is subject to compliance of Sec 137 (Filing of Financial Statements) and Sec 92 (Annual Return) with RoC.

Exceptions (Proviso) –

  • Transaction between Holding and its WOS

           Placed before shareholders at the general meeting for approval (subject to consolidation of accounts)

  • Government Company

           Exempted. Subject to compliance of Sec 137 (Filing of Financial Statements) and Sec 92 (Annual Return) with RoC.

  • Unlisted public company

          Licensed by RBI or SEBI or IRDAI to operate from IFSC located in an approved multi-services SEZ

Note:

Interested Directors should not present in the meeting during the discussions

Corporate Governance Points –

  • As the RPTs between 2 Govt. companies will not be reaching to members for approval, it’s a good practice to place such items before the Audit Committee and the Board for Noting.
  • Directors should also make a disclosure regarding Interest (Section 184) in the respective transactions proposed in the resolution so that it would be easy to track.

Ratification –

  • As per LODR, ratification is not possible (no such option provided). So, a listed company should compulsorily obtain the approval.
  • But the Companies Act has provided the ratification option –

             Upto 1 crore – Audit Committee (within 3 months)            

             Other cases – Board or Shareholders (as the case may be) (within 3 months)

All about Related Party Transactions – Part 2 (Determination & Approval)

  • Related Party Transaction in the context of companies means transaction between the company and its related parties.
  • Every transaction with related party is related party transaction, however, approval mechanism may be different and situational.
  • Transactions with related parties need not always be disadvantageous to the parties concerned. The concern arises only when there is abuse of a related stakeholders.

Specified RPTs under Companies Act

  1. Sale/Purchase/Supply of any Goods/Materials
  2. Sale/Purchase/Leasing of any Property
  3. Availing/Rendering of services
  4. Appointment of any agent for carrying out activities listed above [from points (i) to (iii)]
  5. Appointment to any office or place of profit (Director, Manager etc.) [Company, Subsidiary & Associate] [Note: Holding Company is not included]
  6. Remuneration for underwriting the subscription of any Securities/Derivatives

RPTs under SEBI (LODR)

Transfer of any:

  1. Resources
  2. Services
  3. Obligations

Approval Mechanism

Listed Companies

  • Approval of Audit committee is mandatory for every RPT &
  • Approval of Shareholders (Ordinary Resolution) is to be taken for Material RPTs.

Material RPT = Transactions (either individually or taken as a whole) accounting for [5% in case of Brand/Royalty, 10% in case of other than Brand/Royalty] of the annual consolidated turnover of the listed entity.

Exception:

  • Transaction between 2 Govt. companies
  • Transaction with a wholly owned subsidiary

Unlisted Companies

  • If there is an Audit Committee, its approval should be taken (except Transaction with a wholly owned subsidiary)
  • If there is no Audit Committee and the transactions were entered on Arm’s Length Basis/Ordinary course of business, then no approval is required.
  • If there is no Audit Committee and the transactions were not entered on Arm’s Length Basis/Ordinary course of business, Shareholder’s approval is required if the transactions are Specified RPTs and the Specified threshold is crossed.
  • If the Specified threshold doesn’t cross, Board’s approval is enough.

Specified threshold

  • 10% or more of the respective limits (individually/ taken as awhole during FY)
  1. Sale, purchase or supply of any goods or materials – Turnover
  2. Sale/Purchase of property – Networth
  3. Leasing of property – Turnover
  4. Availing/Rendering of services – Turnover
  • Remuneration for underwriting the subscription of any Securities/Derivatives exceeding 1% of Networth
  • Remuneration (other than Director’s remuneration) exceeding Rs. 2.50 lakhs per month (incl. company, subsidiary & associate)

Arm’s Length Price

The price if the transactions were between two unrelated parties with similarly placed terms & conditions

Ordinary Course of Business

  • MoA Objects clause
  • Activity is routine/normal/common in the particular industry
  • Activity is repetitive/frequent
  • Income earned from such activity is treated as Business Income in the company’s books

All about Related Party Transactions – Part 1 (Definition Part)

Framework Companies Act – Sections 177 & 188 SEBI (LODR) – Regulation 23 Accounting – AS 18, Ind AS 24 What is a Related Party? (Answered as per Companies Act)… Click Here to full read