1.6       Query

Issue of audit report on accounts not approved

by the Board of Directors.

1.A firm of chartered accountants have completed the statutory audit of a State Industrial Development Corporation (registered under the Companies Act, 1956) for the year 1984-85, in the month of May, 1987. After the said audit, the supplementary audit of the company for that year was conducted by the Accountant General’s Office who raised certain queries which were replied to by the said firm. After about a month therefrom, the concerned Audit Officer of the Accountant General’s Department raised another objection regarding contravention of Section 215 of the Companies Act, 1956, on going through the minutes book of the corporation wherein he did not find a resolution with regard to the approval of the balance sheet and profit and loss account for the said year. The Audit Officer returned the copy of the duly audited balance sheet along with the statutory audit report to the corporation for getting the same ‘reapproved’ by the corporation in the Board Meeting and, thereafter, getting the same, “recertified by the auditors”.

2.The corporation accordingly has placed before the Board the same audited balance sheet for ‘reapproval’ and sent the photo-copies of the same for “recertification” by the firm. The firm recently received a letter by the Audit Officer of the Accountant General asking the firm of auditors to recertify the accounts immediately. In an earlier letter the said Audit Officer also held the firm responsible for not pointing out the contravention of section 215. The firm, for the time being, has refused to sign the balance sheet again, on the following grounds:

(a) The balance sheet, profit and loss account and other relevant schedules were delivered to the firm for reporting thereon after having been signed by the Managing Director, another Director, Secretary and others with a remark “For and on behalf of the Board of Directors under Section 215 of the Companies Act, 1956”. The firm’s contention is that the balance sheet could not be signed and delivered to the firm for reporting thereon unless it was actually placed before the Board. By delivering the accounts duly signed by those required to sign under section 215 “For and on behalf of the Board” is an implied information to the auditors that the same has been actually approved by the Board and that formalities under section 215(3) have been complied with. The firm has pointed out that it normally relies on information/ explanations given to it, especially which are of the procedural nature and the firm had no reason to disbelieve the information given by the Managing Director, Director, the Secretary and others like the General Manager (Finance) and Finance Manager. According to the auditors, if they were to disbelieve every statement given by the management, the completion of the audit would become an impossible task to achieve as they would have to investigate into every statement made by the management. Since, in view of the ‘re-approved’ balance sheet for the said year being the exact photo-copy of the audited balance sheet and that there is no change in the accounts, the auditors have contended that there was no need for such re-authentication. Besides, according to the firm, there is no provision in section 215 of the Companies Act, where-under, signatures of the auditors on the balance sheet and the report on the same would become “Null and Void” under such circumstances necessitating the “reauthentication”.

(b) The auditors have asked the corporation to advise them as to under what provisions of the Companies Act they have got to reauthenticate the balance sheet. No reply has been received from them so far.

(c) The auditors have also written to the Registrar of Companies for the advice but nothing has been received from him so far.

(i) Whether signing the balance sheet and issuance of report thereon have become “Null and Void”, in the circumstances explained above.

(ii) Is it necessary to re-authenticate the balance sheet and issue a fresh report? The mode in which such re-authentication should be done may also be communicated.

                                          Opinion                                           December 29,1988

1. The Committee notes that whether signing of the accounts and auditors’ report thereon are null and void where Board of Directors have not approved the said accounts in the first instance, is a legal question. The Committee wishes to draw the attention of the querists to Rule 2 of the Advisory Service Rules, according to which, the Committee is prohibited from giving opinion on matters involving interpretation of law only. The Committee, therefore, refrains from expressing any opinion on the foresaid matter.

2.The Committee is of the view that adoption of accounts by the Board of Directors, as per the requirement of section 215 of the Companies Act, 1956, is not a routine procedural matter. Thus, the auditors should not infer merely from the fact that since the accounts have been signed as prescribed under the aforesaid section, the same must have been approved by the Board. The Committee is therefore of the view that it is the duty of the auditors to ensure that the balance sheet and the profit and loss account had been approved by the Board of Directors before they were signed on behalf of the Board in accordance with the provisions of this section and before they were submitted to the auditors for their report thereon.

3.The Committee notes from the facts of the query that the corporation has placed before the Board, the same balance sheet for ‘reapproval’. The Committee is of the view that since the accounts were not approved earlier, the question of ‘reapproval ‘ thereof does not arise. Thus, in the view of the Committee, the accounts would be ‘approved’ for the first time as per the requirements of the Act. Since the auditor is required to give his report only after the approval of the accounts as prescribed under section 215 of the Act, it would be proper for the auditor, in the opinion of the Committee, to issue a fresh audit report bearing the date on which the accounts are now approved by the Board or a date subsequent thereto, with a proper disclosure that he had signed his report at an earlier date also.

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