1.37     Query

Documentary Proof of Expenditure of TA/DA to Board Members

for Attending Board Meetings and Auditor’s Duties.

A private limited company is having its place of business at Bombay but its directors are stationed outside Bombay.  The company holds 4 to 5 Board meetings per year.  For the purpose of such meetings the directors travel to and fro Bombay.  The travelling expenses incurred by the directors are reimbursed by the company to the extent of actual air fare.  In addition to this they are also given allowance of Rs. 150/- per day for 3 days towards expenses incurred by them during their period of stay in Bombay.  The expenses of each Board meeting amount to approximately Rs. 10,000/-.  The company does not ask the directors to furnish air tickets evidencing the travelling expenses incurred by them or hotel bills in support of the other expenses incurred.

It is the contention of the directors that it is not necessary to furnish the said air tickets or hotel bills because their attendance is recorded in the attendance register maintained by the company for the meeting. Moreover the directors give receipts to the company in acknowledgement of such payments.

We would like to have your view whether an auditor would be failing in his duties if he does not insist on the production of necessary evidence such as air tickets and hotel bills.

                                                           Opinion                                                    March 21, 1977

There is no mention in the query whether the Articles of Association of the company entitle the Directors to travelling and stay expenses in connection with attendance at Board meeting. If there is no special provision in the Articles of Association permitting such payment, event then such payment would be permissible in terms of Regulation 65 of table ‘A’ to the First Schedule of the Companies Act, unless by specific article the application of that Regulation is either excluded or modified. It is presumed that in the present case the Articles and the Resolution of the Board permit payment of travelling expenses and halting allowance. It would appear from the query that the halting expenses are given by Way of a fixed allowance at the rate of Rs. 150/- per day for three days. If this is so, the Auditor would be entitled to assume that the Board has Fixed the said allowance after duly taking into account the extent of expenditure that may require to be incurred by the Directors for their stay in a city like Bombay for the purpose of the meeting, and have standardised the amount at Rs. 150/-. In such a case, in the opinion of the Committee, the Auditor would be justified in accepting such payments which are in conformity with the Articles of Association and/or the Board Resolution, as the case may be, without insisting on the proof of the amount having been actually expended.  If, however, on the other hand the Directors are entitled to reimbursement of expenses to the extent to Rs. 150/- per day, the Auditor would be justified insisting on proof of such expenditure having been actually incurred by the concerned Directors.  In other words, there should be no attempt to pass on a remuneration element in the garb of reimbursable cost.  The Auditor will be duty bound in such a case where there is reason for him to suspect that such payment is partly by way of remuneration and partly by way of reimbursement of expenses on stay, to ask for proof of expenses.  As regards the travelling expenses also the duty of the Auditor will depend upon the exact wording of the Articles of Association and the Board Resolution.  For instance, if it is provided that a Director is entitled to reimbursement of expenses to the extent of the actual air fare to and fro his city of residence, the Auditor should ordinarily be satisfied with the acknowledgement of the recipient Director in respect of such payment.  If, however, on the other hand, the permissible limit is to the extent of actual expenditure incurred, but not exceeding an amount of the actual air fare, the Auditor would again be justified insisting upon the proof of such expenditure having been incurred.  In other words, the satisfaction of the Auditor should broadly depend upon whether the reimbursement of the actual air fare or the daily payment at the fixed rate of Rs. 150/- is a “measure of payment”, rather than a compensation for the actual expenditure incurred.  If the Articles of Association and/or the Board Resolution intends to fix it as a “measure”, the Committee is of the opinion that there is no duty on the Auditor to further express the opinion as to the propriety or otherwise of such payment.  If, however, the actuals are to be reimbursed, it should be incumbent on the Auditor to insist on appropriate proof of the extent of expenditure incurred and if the reimbursement is in excess of the actual amount, he would be required to express a reservation in that respect in his report.  The standard of appropriate proof is a matter of personal judgement of the Auditor depending upon the facts and circumstances of the case, having due regard to the position of the Director concerned.  In certain circumstances even a declaration of the Director that the amount in question has been expended by him may be adequate in the absence of grounds for suspicion.

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