Legal provisions and contracts are made to be followed. This is the foundation of any effective legal system, but it cannot be the supreme principle governing the law in every circumstance.

If there are changes in the legal landscape that sometimes make performance impossible and more onerous for one party, such changes are questionable in law.

The new Companies Act and the rules published for comments have provisions that cast onerous responsibilities on the auditor beyond those of the management and board:

The auditor should certify proposed or future related-party transactions for prospectus, in contrast to the current scope restricted to such transactions appearing in the financial statements.

When financial statements are revised, the auditor should ensure that anyone in receipt of the previously issued financial statements is informed of the situation.

The auditor has to ensure that his son’s son, brother or sister, son-in-law have not invested more than Rs 1 lakh or given guarantee or security in connection with indebtedness to a third person, to the company or its subsidiary or its holding or associate company or a subsidiary of its holding company.

The auditor shall be disqualified for any legal proceeding against him — that is, including tax disputes or tenancy matters, which are irrelevant for appointment as auditor.

An auditor cannot use business services like any other customer in the medical, hospitality, consumer goods and telecom services if he audits any of them.

The auditor should report to the Central Government any fraud committed against the company. Although the rules allow a time limit of 30 days, it is grossly inadequate to make an assessment of the fraud, quantify the impact and report it.

The auditor has to report on non-material and systemic issues, while the auditing standards prescribe reporting on material frauds only.

For such non-material frauds, the auditor is not given any time limit; to seek responses, and if no responses are received, inform the Central Government immediately on the non-material and systemic issues, which is impossible.

These are clear mandates in which auditors have excessively onerous duties and responsibilities. It also results in excessive cost.

These situations are referred to as hardship in the English legal parlance, and together with the impossibility it is the English doctrine of frustration.

The law has cast responsibilities beyond the auditing standards in case of fraud.

The standards restrict the auditors’ responsibility to fraudulent financial reporting and misappropriation of assets, whereas fraud would be in relation to the affairs of a company or any body corporate, including any act, omission, concealment of fact or abuse of position committed by any person or with connivance, to deceive, gain undue advantage from, or injure the interests of the company or its shareholders or creditors or any other person, whether or not there is any wrongful gain or wrongful loss.

Now ‘fraud’ can be any act by any person connected with the company to which the auditor may not have access as it is not in his scope or he is not auditing the other person’s books.

Similarly, the auditor cannot certify mens rea or identify circumstances which have not yet resulted in wrongful gain or loss, and they will not be visible to him.

The punitive provisions could result in imprisonment of up to ten years.

Will these provisions in the new Companies Act change for the better?

Doctrines of impossibility, frustration of purpose and impracticability are basic circumstances when courts excuse performance. Will that legal recourse be considered, as also the profession’s plea to make the rules more practical?

If the current rules are enacted, will we witness an exodus of chartered accountant professionals? Will it deter youngsters from entering the profession due to the threat of litigation?

(The author is Partner, Deloitte Haskins & Sells)

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