The Centre proposes to soften the blow on practising auditors, company secretaries and cost accountants if they were to be found in violation of the fraud reporting obligations under the existing Companies Act 2013.

The new amendment Bill — Companies (amendment) Bill 2020 — has now proposed revision in the fine that could be levied on such professionals.

As against the existing regime, where the fine could range anywhere from ₹5 lakh to ₹25 lakh, the new Bill — which was introduced in the Lok Sabha on Tuesday — has said that a penalty of ₹5 lakh could be levied on such practising professionals — in the case of a listed company — if they fail to report frauds committed by the company or its employees to the Centre.

For any other company, the penalty has been pegged at ₹1 lakh.

It may be recalled that the Company law has mandated a statutory auditor to do direct reporting of frauds (to the central government) in addition to their existing responsibilities of reporting requirements to the shareholders of the company.

Simply put, the current company law had transformed the role of the statutory auditors from being a watchdog to a whistleblower, say corporate observers.

Experts’ take

Ashok Haldia, former Secretary of CA Institute, said that in a response to the Satyam scam, the penal provisions in the Companies Act 2013 were made stringent including for auditors for enforcing compliance.

The thinking now is that these are too harsh and in the absence of effective enforcement, the provision of stringent penalty has remained meaningless. Unfortunately, legislative action in the both the cases is without any worthwhile empirical research.

The new Bill (clause 30) seeks to substitute a fixed amount of penalty albeit separately for listed and unlisted company, in place of a range of amount as earlier. The amount of penalty has been substantially reduced.

“It would have, however, been logical to link the penalty for failure of auditor in reporting fraud or likely fraud to a percentage of audit and non audit fee payable/ paid to auditor,” Haldia said.

G Ramaswamy, former President of CA Institute, said that the proposed change in penalty regime for ‘fraud reporting’ will bring clarity and is in line with the recommendations of the company law committee. Also, there will now be very little discretion besides bringing the penalty provisions in line with the Chartered Accountants Act

Raj Bhalla, Partner, MV Kini & Co, a law firm, said that the reduced amount of penalty for non-reporting by auditors may create an environment of reduced transparency and relieving a certain set of individuals from the errors committed by them in those areas where they are adjudged as experts.