1.26     Query

(i)      Auditor’s responsibility towards individual shareholders seeking additional information/explanations

(ii)     Disclosure in financial statements of tax audit fees paid to chartered accountants other than the statutory auditors where one or more partners are common

1. Many a times the statutory auditors receive letters from shareholders of public limited companies either directly or through the company, seeking the following information:

(a) Details of certain expenses.

(b) Explanations for variations in expenses as compared to previous year.

(c) Explanations for not qualifying the reports for one reason or the other.

2.The querist has sought the opinion of the Expert Advisory Committee, whether under the circumstances, the auditor is bound to entertain such letters and give detailed replies to individual shareholders, or in other words, whether an auditor has privity of contract with individual shareholders.

3.The querist has also sought the opinion of the Committee in case of a limited company, where the statutory audit is undertaken by one firm of chartered accountants (say ‘A’) and taxation/tax audit is handled by another firm of chartered accountants (say ‘B’), whether it is necessary to disclose separately the fees paid to firm ‘B’ for tax matter/tax audit etc., if one or more partners of firm ‘A’ and ‘B’ are common in view of the provisions of Clause 4(b) of part II of Schedule VI to the Companies Act, 1956.

                                                                        Opinion                                  September 15, 1987

1.The Committee notes that Section 224 of the Companies Act, 1956, states that “Every company shall at each annual general meeting, appoint an auditor or auditors……” (emphasis supplied by the Committee). The Committee also notes that Section 227 of the Act requires the auditor(s) to report to the members of the company in the form and in respect of the matters prescribed therein. The Committee is therefore of the view that the statutory auditors are appointed by the ‘company’, i.e., body of shareholders and not by individual shareholders and are required to disclose to the shareholders as a body, only that information which has been prescribed under the Act. In view of this, the Committee is of the opinion that the statutory auditors are not required to provide any information/explanations to individual shareholders. In this context, the Committee wishes to mention that in case a statutory auditor provides additional information, he may be held guilty of professional misconduct pursuant to Clause I of Part I of Second Schedule to the Chartered Accountants Act, 1949 which states that a “….. Chartered Accountant in practice will be deemed to be guilty of professional misconduct…..if he discloses information acquired in the course of his professional engagements to any person other than his client, without the consent of his client or otherwise than as required by any law for the time being in force”.

2. With regard to disclosure in profit and loss account as per Clause 4-B of Part II of Schedule VI to the Companies Act, 1956, in respect of tax audit fees paid to a firm of chartered accountants which is not the statutory auditors of the company, but having common partners, the Committee notes that para 15 of ‘Statement on Payments to Auditors for other Services’, issued by the Institute of Chartered Accountants of India, states as below:

            “A question as to whether if a company pays any fee for remuneration to one of the partners of the firm who is acting as its auditor, separate disclosure is required in respect of the fee or remuneration so paid. The Council is of the view that the requirement as to the separate disclosure of fees paid in other capacity should be more properly construed in the context of the spirit behind such requirement and accordingly, recommends that even in the aforesaid case, separate disclosure should be made in respect of fees paid by the company to the partner of the firm who is its auditor.”

3.On the basis of the above, the Committee is of the opinion that for the purpose of Clause 4-B of Part II of Schedule VI to the Companies Act, 1956, separate disclosure in respect of tax audit fees paid to a firm of chartered accountants other than the firm of statutory auditors, where one or more partners are common, is called for.

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