1.17 Query Auditor’s qualification where provision for gratuity has not been made
1. The querist has drawn the attention of the Expert Advisory Committee to para 2.2 of “Statement on the Treatment of Retirement Gratuity in the Accounts”, published by the Institute of Chartered Accountants of India, which states as follows:
“The need to provide for accruing gratuity liability is based on sound accounting considerations and exists regardless of whether in the computation of taxable profit, it is or is not allowed as a deduction. At the same time it is appreciated that when deciding whether or not to make provision for accruing gratuity liability, management may find that special circumstances exist which provide valid justification for not making a provision. The Council is of the opinion that in all such cases, when provision for accruing gratuity is not made, or if made is inadequate, the matter should be referred to by way of a note in the accounts indicating the total accrued liability, appropriately calculated or the shortfall in the provision as the case may be.”
2. The querist has also drawn the attention of the Committee to the clarification issued by the Ministry of Law, Justice and Company Affairs, Department of Company Affairs, in their Circular No. 13/77 dated 21st November, 1977 which reads as follows:
“In case the company does not provide for the ‘gratuity liability’ or does not state the quantum of gratuity liability’ by way of a note, the balance sheet and profit and loss account cannot be regarded as disclosing a true and fair view of state of affairs. It is hence the duty of the Auditors to qualify their reports to this effect and specifically state that the requirements of the Schedule VI have not been complied with properly. This has also been made clear in paras 8.7 and 8.8 of the ‘Statement on Auditing Practices’, issued by the Institute of Chartered Accountants of India.”
3. A company has been consistently accounting for retirement gratuity on cash basis with a note reading as follows:
“The total gratuity liability as at 31st December, 1986 has been actuarially computed net of tax at Rs. 200 lacs; gross Rs. 400 lacs (previous year net of tax Rs. 150 lacs; gross Rs. 300 lacs). This liability has not been provided for in the accounts, except in the case of retired employees, where the liability has arisen, as the company treats this on cash basis.”
The valid justification for adopting procedures, according to the querist, is consistency and that any change to accrual method without setting up a fund will distort its present net worth position.
4. According to the querist, neither the Institute’s “Statement on the Treatment of Retirement Gratuity in Accounts” nor the CLB’s circular cited above indicate that the auditors’ report should be qualified where there is sufficient disclosure of the accruing gratuity liability in cases where retirement gratuity is accounted for on cash basis.
5. The querist has sought the opinion of the Expert Advisory Committee whether it would be sufficient compliance with the Statement on Qualifications in Auditor’s Report if the auditors do not qualify the report with respect to gratuity on the basis of the above note given by the company.
Opinion June 24, 1987
1. The Committee notes that apart from the aforesaid pronouncements, ‘the Statement on Auditing Practices’, issued by the Research Committee of the Institute of Chartered Accountants of India, has recommended in paras 9.12 and 9.13 as below:
“9.12 where there exists an accruing liability for gratuity, it has to be ascertained that adequate provision on the basis of figures supplied by the management is made. The computation of the accruing liability should be test checked. An exact computation of this liability is dependent on determination of various factors like life expectancy of employees, rate of staff turnover, the prevailing rate of interest etc. In this connection attention of members is invited to the Institute’s Statement on the Treatment of Retirement Gratuity in Accounts.
9.13 If no gratuity is provided for, a note should be made on the balance sheet indicating the total amount arrived at as above. If no information is furnished by the company the fact should be disclosed in the auditor’s report.”
2. From above, the Committee notes that provision for gratuity should normally be made except where ‘special circumstances’ exist which provide valid justification for not making a provision, in which case, the matter should be referred to by way of a note in the accounts indicating the total accrued liability, appropriately calculated.
3. The Committee is of the view that consistency and non-setting up of gratuity fund do not signify special circumstances so as to justify non-provision of gratuity liability. The Committee is therefore of the opinion that the auditor should qualify his report in the manner recommended in the Institute’s Statement on Qualifications in Auditor’s Report even though the amounts etc. of the accrued gratuity liability are disclosed in the accounts. ___________________________ |