Auditor’s report on accounts revised by the Board of Directors

before submission thereof at the Annual General Meeting

1.The audit of accounts for the year 1982-83 of a State Government undertaking registered under the Companies Act 1956 has recently been completed. The auditors’ report to the shareholders of the company was handed over to the company on 3^rd October, 1984 and copies thereof were forwarded to the Accountant General of the concerned state and the C & AG at New Delhi. The auditors have now been informed that the management of the company is contemplating to amend the accounts and get a revised or amended audit report from the auditors.

2.In this context, the querist has drawn the attention of the Expert Advisory Committee to the ‘Guidance Note on Auditor’s Report on Revised Accounts of Companies’[1], issued by the Institute of Chartered Accountants of India, according to which the Board of Directors of a company are competent to revise the accounts before they are laid before the Annual General Meeting of the company. The Guidance Note also suggests the manner in which the auditors may revise their earlier report and submit a revised report on the amended accounts.

3.The querist is of the view that the recommendations of the abovementioned Guidance Note are not proper since whenever mistakes/irregularities etc. are discovered and reported, the management would be tempted to revise the accounts and resubmit them for the auditors’ report. The querist feels that if this right is given to the Board, there would be no end to the audit as accounts can be revised again and again. In the view of the querist, such a revision involving few mistakes in adjustments or clerical errors may be proper. This may however be misused where certain omissions or excess payments are cleverly laid out which the auditors may not discover and give a clean report but in case these are discovered by the auditors, the management may offer to revise the accounts. The querist is of the view that if this power is given to the management their responsibility to keep and submit proper and correct accounts will be lost. He wants to know that where such irregularities causing major changes in value of assets and liabilities of the companies are made repeatedly year after year, in spite of auditors’ comments on the same, whether it will be fair on the part of the statutory auditors to exclude their comments on those items in their report, by allowing the management to amend the accounts, particularly, in the case of Government companies where the accounts and reports have been forwarded to the Accountant General and the C & AG, and where the Accountant General’s office has also verified and completed their verification on behalf of the C & AG?

4.In the light of the above facts, the querist has sought the opinion of Expert Advisory Committee on the following issues:

(i) Are the Boards of companies competent to ask for amended audit reports, once the report has been finalised and handed over to the management, where the reports contain several irregularities of a serious nature and copies thereof have been forwarded to the Accountant General and their audit has been completed?

(ii) In case the answer to (i) above is in the affirmative whether the auditors should examine the accounts again after amendment and submit an amended/fresh report thereon? Whether the fresh report is to be considered as an amended or supplementary report to the first report or whether the original report is to be scrapped and a fresh one without mentioning the defects noticed in the first one, to the extent rectified, shall have to be furnished?

Opinion 1^st April, 1985

1. The Committee notes that the Guidance Note, referred to by the querist in para 2 above, states as below:

“1. The attention of the Council has been drawn to the fact that in some cases, the balance sheet and the profit and loss account of companies, approved by the Board of Directors and authenticated on its behalf in terms of Section 215 of the Companies Act and audited and reported upon by the statutory auditors are amended by the Companies for various reasons before circulation to the shareholders. In such cases, the amended accounts are re-approved by the Board of the Companies and statutory auditors are requested to make a report once again on the amended accounts.”

“2. The question which arises for consideration is the manner in which the statutory auditor should report upon such amended accounts. The statutory auditor owes a duty to the members of the company and this duty is completed when he addresses a report to the members. It is for the company to circulate the report to the members. The Companies Act does not normally contemplate the revision of the accounts and a further report by the statutory auditor on the amended accounts. At the same time, it is entirely within the competence of a Board of Directors to amend the accounts and resubmit them to the statutory auditors for report before the accounts are placed before the annual general meeting. The report issued by the statutory auditors on such amended accounts will be in substitution of the report issued on the accounts before amendment and unless all copies of the original accounts and reports are returned to the auditors, such substitution is not possible.”

“3. Having considered the issue involved and to safeguard the position of the statutory auditor, the Council recommends that members of the Institute, when called upon the issue a report on the amended accounts for the same period consequent upon the revision of the balance sheet and/or the profit and loss account should ensure that unless all copies of the original accounts and report are returned to the auditor, an adequate disclosure of the fact of the revision on the accounts already approved by the Board and reported upon by the statutory auditors appears as a specific Note on the amended accounts. In case the statutory auditor is satisfied that the disclosure so made by the company in the Note on the accounts is adequate, there may not be any further need for the auditor to refer to the revision of the balance sheet and/or the profit and loss account in his report. However, if the Notes to accounts do not contain any note on the revision or if such a note is contained therein but not considered by the statutory auditor as adequately comprehensive, it will be the duty of the statutory auditor to refer to the fact of revision of the accounts in his report”.

“4. In the opinion of the Council the general principles enunciated above are as well applicable to the audit of the accounts of Government Companies as defined in Section 617 of the Companies Act. In respect of such Companies, since it may not be possible for all copies of the original accounts and report to be returned to the auditors, it would be necessary to ensure that adequate disclosure is made as discussed above either by way of a Note in the accounts or by a reference in auditor’s report.”

2.On the basis of the above, the opinion of the Committee, on issues raised by the querist in para 4, is as below:

(i) A Board of Directors is competent to amend the accounts and re-submit them to the statutory auditors for their report before the accounts are placed before the annual general meeting even though the copies thereof have been forwarded to the Accountant General and the C & AG and their audit has been completed.

(ii) The auditors should examine the accounts again after amendments to satisfy themselves about the appropriateness or otherwise of the amendments. The report issued by the statutory auditor on such amended accounts will be in substitution of the report issued on accounts before amendment. In other words a fresh audit report has to be issued on the amended accounts and all copies of the first report have to be withdrawn. In case it is not possible to withdraw all copies of the original accounts and the original report of the auditor, an adequate disclosure of the fact of the revision of accounts approved by the Board and reported on by the auditor should be made in amended accounts. In case the auditor is satisfied about such disclosure, he may not refer to this matter in his report. However, in case he feels that the disclosure is not adequately comprehensive or no disclosure has been made in the amended accounts, it will be the duty of the auditor to refer to the fact in his revised report.

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[1] Published in December 1979 issue of ‘The Chartered Accountant’ (page 554)