Query No. 42
Subject: Whether a chartered accountant is competent to comment on draft rehabilitation scheme of a sickcompany and on the impact of qualifications in the auditor’s report on the profitability of the company.1 A. Facts of the
Case
1. A Public
Sector Undertaking (PSU) of the Central Government is being financed by a
consortium of banks. As per the querist, the company
2. The leader
of the consortium has appointed stock auditors to conduct Stock and
Receivables Verification Audit
of the unit.
The terms of reference (scope of audit) cover, inter
alia, the following:
(i) The company
is a BIFR case and the draft rehabilitation scheme given by
the company is
considered by the
consortium as unviable and
considered as not
acceptable. If stock
auditors have any comments, these may be incorporated in their Stock
Audit Report for bank’s confidential use.
(ii) Impact on
loss of the company with reference to the various qualifications in
the audit report
of the company’s
auditors and the C&AG
audit during last 3
years and the
company’s explanations on the qualifications in the audit report. How
far the company’s explanations are in keeping with the generally accepted
accounting standards?
3. As per
the querist, the
statutory auditors of
the PSU have
given several qualifications in their audit report. While the company
has given some explanations for audit observations in the published directors’
report, the company is
not inclined to
provide the stock
auditors the relevant papers/documents/files. The
company’s views in respect of the scope of the audit are as under:
(i) The stock
auditors who are expected to verify and certify the stock holding
of the company
are neither competent
nor expected to comment on the draft rehabilitation scheme of the company. Commenting on such a scheme by the stock auditors
is uncalled for.
(ii) The stock
auditors have no authority to undertake such studies and to give their views as
it is against the normal practice of professionals in the field.
(iii) The impact on
loss of the company with reference to the various qualifications in the audit
report has no relevance whatsoever to
the stock audit.
The stock auditors
have neither the competence nor the authority to sit in
judgement in such matters as the opinion varies from professional to
professional. Stock auditors have no jurisdiction to give their views in the
matter. The qualifications (of the statutory auditors) and the comments given
by the company are available in the annual report and the appropriate
authorities can make their own decisions as to the viability or otherwise of
the company. The stock auditors have nothing to do with this matter and it may
not be a normal practice of a professional to give such views for which they
have no
jurisdiction and competence.
As such, the
stock auditors may refrain from giving their views in the matter.
4. According
to the
querist, the PSU
has also not
made the relevant information available
for perusal of the stock
auditors. However, the qualifications/comments made by statutory
auditors and Comptroller and Auditor General of
5. In view
of the above
stand taken by
the PSU, the
stock auditors have refrained
from giving their views
on the relevant
scope of audit, stating that
they intend to
refer the matter
to the Expert
Advisory Committee of the Institute of Chartered Accountants of India. 6. According to
the querist, the stock auditors have apprised the leader 7. As per
the querist, the
bank took up
the matter with
BIFR and submitted that the
opinion of the stock auditors was necessary for them 8. According to
the querist, the scope of audit as defined by the leader of consortium of
bankers includes: (a) Comments on
impact on losses/networth of
the PSU on the
basis of
qualifications/comments of statutory
auditors/ Comptroller and Auditor General of India.
(b) The
company’s explanations on audit reports and how far the company’s explanations
are in accordance with the generally accepted accounting principles. (c) Draft
rehabilitation scheme of the PSU submitted to BIFR. B. Query
9. The querist
has sought the opinion of the Expert Advisory Committee
C. Points
considered by the Committee
10. The Committee
notes that the Council of the Institute of Chartered Accountants of
India, has defined
the expression, ‘Management Consultancy and other Services’,
which can be provided by a chartered accountant in practice, as below:
“The expression ‘Management Consultancy and other Services’
.....includes the following: (i) Financial management
planning and financial
policy determination.
(ii) Capital structure
planning and advice
regarding raising finance.
(iii) Working capital
management. (iv) Preparing
project reports and feasibility studies. ......... (vii) Inventory management, material handling and storage.
......... (xiv) Management and operational audits. ......... (xvi) Business
Policy, corporate planning,
organisation development, growth and diversification. .........” 11. On the
basis of the
above, the Committee is
of the view
that commenting on the draft BIFR scheme is similar to the services
mentioned above. The other two aspects
mentioned in paragraph 8 above, are the functions which
are incidental to the functions
which a chartered accountant performs
as an auditor. The
Committee is also
of the view that
the professional conduct
does not prohibit
a chartered accountant from performing
such services. The
Committee is, accordingly,
of the view that a chartered
accountant can carry out the assignments referred D. Opinion
12. On the basis of the above, the Committee is of the opinion that a chartered accountant can carry out assignments on matters referred to in paragraph 8 above.
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