1.1       Query

Qualifications in auditor’s report in case of violations of the relevant

statutory provisions

1.Section 27 (2) and (3) of the Warehousing Corporation Act, 1962, regarding borrowing powers provides, as under: -

“27(2).  A Warehousing Corporation may, for the purpose of carrying out its functions under this Act, borrow money-  

(i)    from the Reserve Bank or

(ii) from the State Bank , for such periods for which and upon any of the securities against which, it is authorised to advance and lend money, under the provisions of the State Bank of India Act, 1955,or 

(iii) from any nationalised bank, or 

(iv) from such insurance company, investment trust or other financial institution as may be approved by the Central Government in this behalf.

27(3).   Subject to the proviso to sub-section (1), the Central Warehousing Corporation may borrow money from the Central Government and a State Warehousing Corporation may borrow money from the State Government and the Central Warehousing Corporation on such securities and on such terms and conditions as may be agreed upon between the borrowing corporation and the lender in each case”.  

2. The corporation in question has been borrowing from the Food Corporation of India (FCI) which in turn gets it financed by means of a corresponding loan from the government of India. The interest and loan instalments paid by the corporation to the FCI are simultaneously passed on by the latter to the Government. The purpose of the loan is to construct godowns by the corporation for the FCI, the ownership in respect of which will be transferred to the former by the FCI after 15 years of completion of construction. The querist is of the view that borrowing from the FCI is in contravention to provisions of section 27(2) of the Warehousing Corporation Act, 1962.   3. The Querist has sought the opinion of the Expert Advisory Committee as to whether aforesaid borrowings from the FCI are in contravention to the provisions of Section 27 (2) of the Warehousing Corporation Act, 1962 (reproduced in para 1 above) and, if so, how the auditor should qualify his report.

 Opinion                             December 22, 1986  

On the basis of the facts of the query, the Committee is of the opinion that loan from the Food Corporation of India is in contravention to section 27(2) of the Warehousing Corporation Act, 1962, provided the Food Corporation of India has not been approved by the Central Government as a financial institution under clause (iv) of section 27(2). The auditor should therefore qualify his report as recommended in para 3.17 of the Statement on Qualifications in Auditor’s Report, issued by the Institute of Chartered Accountants of India. The said para is reproduced below:  

“In some cases the auditor’s objection may be of such a nature that it is his duty to bring it to the attention of shareholders, e.g., where there is a breach of law. It would not be sufficient in that case to merely state the facts leaving it to be inferred therefrom that a contravention of legal requirements has arisen. It is the auditor’s duty not only to state the facts which give rise to the legal contravention, but also to point out that, in his opinion, a contravention of the law has occurred. For example, if a company has not separately invested the provident fund moneys of its employees, it would not be sufficient for the auditor in his report merely to state this fact. He should go further and point out that the facts as stated constitute, in his opinion, a contravention of the requirements of Section 418 of the Companies Act.”

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