3.8       Query

Interpretation of Section 215(3) of the Companies

Act, 1956.

“The Balance Sheet and the Profit and Loss Account 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”.

It would, therefore, be observed that it is only after the statements of accounts have been approved and signed by the Board of Directors that the Auditors are required to submit their report thereon. It is noticed that in recent times certain directors, as a policy, insist that the statements of accounts should be initialled by the auditors before they are placed before the Board. This is because it is almost the universal practice to have the accounts audited before they are placed before the Board of Directors. If such a procedure is followed, the director may contend that he has signed the accounts on the faith of the initials put by the auditors and that accordingly, the auditors are primarily responsible for the accuracy of the accounts.

The question, therefore, is whether it would be a correct practice for an auditor to initial the statements of accounts of a company before they are placed before the board in spite of the requirements of sub-section(3) of Section 215.

                                                                     Opinion                                         August 19, 1963

The purpose of enacting Section 215 was to bring home to the Directors their primary responsibility of preparing the accounts of the company in the form required by law showing a true and fair view, etc. In order to emphasise this, the section provides that the directors shall approve the accounts before they are submitted to the auditors for their report thereon. If the above Section were to be taken literally, the audit would not be started until after the accounts have been prepared and approved by the directors.  In practice, such a procedure would be quite unworkable and therefore it is found that the auditor commences his audit as soon as the books of accounts have been written up and the trial balance made available to him. Ultimately, the accounts are prepared either by clients’ staff or by the auditor’s own staff (depending on the arrangement with the client) and after the various questions which arise during the audit have been resolved in discussions with the management, the final accounts are approved by the auditor.  This approval of the auditor may be signified by any form, e.g., by a separate letter, but it is usual and customary to do so by intialling the draft set of accounts. The directors of the company are not always concerned with the day to day management of the company and therefore at the time when the accounts are approved by them, they wish to be sure that the accounts which they approve have already been reviewed by the auditor and will be the subject matter of an unqualified report by the auditor. It should be remembered that under Section 217(3) of the Act, the directors are required to give “the fullest information and explanations” on “every reservation, qualification or adverse remark” of the auditors. Directors would therefore naturally like to be assured when they approve the accounts whether the auditors will in fact give an unqualified report. If the auditor wishes to give a qualified report, the directors may wish to change the accounts or give an explanation for the qualification. It is, therefore, the opinion of the Committee that the procedure described by the Member in his letter is commonly followed in practice and there is no justification for a Director of a company to contend “that he has signed the accounts on the faith of the initials put by the auditors and accordingly the auditors are primarily responsible for the accuracy of the accounts.” The directors’ responsibility for preparing the accounts is a statutory responsibility laid down in Sections 209 and 211 of the Act and it is not possible for the directors to escape such responsibility.

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