1 Restrictions of section 224(1B) removed for private companies1.1 Readers are aware that section 224(1B) provides for certain qualitative and quantitative restrictions on appointment of auditors. Broadly stated, it provides that an auditor shall not audit more than 20 companies of which not more than 10 shall have paid up capital of Rs 25 lakh or more. This restriction is only with regard to amount of paid up capital and not with regard to whether the companies are private, public or listed.

1.2 This provision also disqualifies a person who is in full time employment elsewhere to act as an auditor. It also clarifies how these provisions will apply to firms of auditors.

1.3 Now, this provision shall not apply to a private company. Thus, an auditor can now carry out audits of private companies, irrespective of their amount of paid up capital and without any limit of numbers. The limit of twenty companies and the further sub limit of ten companies having paid up capital of Rs 25 lakh or more relates only to public companies.

Further, a person who is in full time employment elsewhere would also be able to carry out audits of private companies. He, of course, would have to ensure due compliance of the provisions of the Chartered Accountants Act and regulations made thereunder which restrict practicing chartered accountants from taking up full time employment.

1.4 It may be recollected that the concept of deemed public companies has been made redundant and those private companies that have retained the restrictive provisions as contained in section 3(1)(iii) in their articles have now become private companies. These would include many large companies that had become deemed public companies on account of their huge turnover Thus, the provisions of section 224(1B) shall not apply to such companies too.

1.5 Private companies that are subsidiaries of public companies are now public companies. Accordingly, the restrictions of section 224(1B) would continue to apply to them as they applied before the amendment.2 Auditor not to hold securities carrying voting rights of the company2.1 To the list of disqualifications for an auditor, an additional item has been added. It is now provided that holding of a security in a company by an auditor would disqualify him to act as an auditor of that company. This disqualification would come into effect one year hence, ie from December 14, 2001.

The reason for making this transitional provision is that this section applies even to appointment of auditors already made. On account of this transitional provision, an existing auditor holding such securities has a choice either to transfer such security during the period of one year or withdraw from the appointment as auditor of such company.

2.2 Security for this purpose means only those instruments that carry voting rights. The term security is widely defined and most forms of instruments including shares (of various types), debentures, etc would get covered.2.3 Quite clearly, the term security for this purpose would include equity shares carrying voting rights. Public companies can now issue equity shares carrying differential voting rights. Thus, a company may issue shares with no voting rights also.

2.4 The question that arises is whether voting rights should be at general meetings or even at class meetings of special classes of shareholders or other security holders to consider amendments to their rights or for other such purposes. In the broad sense of bearing voting rights for class meetings, most securities may be having voting rights.

However, though not specifically stated, it appears that the intention is to cover only those securities that have voting rights at general meetings. Thus, non-voting equity shares, debentures, etc. would not be covered. Auditors can freely hold such non-voting securities without being disqualified to act as the auditor of that company.

2.5 The disqualification does not apply to holding by relatives of auditors or companies in which he has substantial interest. This obviously would dilute the effectiveness.

2.6 The prohibition is on holding any number of such securities and not on any material holding. Thus holding of even 1 such security would act as a disqualification.

3 Adverse remarks in auditors' report to be highlighted3.1 It is well known that owing to multiple requirements of reporting, the auditors report tends to become relatively lengthy and the shareholders may not notice any adverse remarks or even recognise whether a particular remark is adverse or not. To ensure that the adverse remarks are noticed, an amendment has been made that the audit report should mark in thick type or in italics "the observations or comments of the auditors, which have any adverse effect on the functioning of the company".

3.2 As the words highlighted above show, only those observations that have "any adverse effect on the functioning of the company" are to be highlighted. These words are, firstly, vague, secondly irrelevant and thirdly misleading. It is not the job of the auditor to find out those aspects that adversely affect the functioning of the company. What things have such adverse effects is also subjective and difficult to determine.Would an unqualified audit report mean that there is nothing that is having an adverse effect to the functioning of the company? Clearly, readers would have to realise that the auditors' findings would be restricted to those areas that an auditor checks as per his statutorily defined scope.

3.3 In fact, the auditor may make several negative or adverse remarks that do not necessarily adversely affect the functioning of the company. These remarks, though negative, may go without any highlight.

4 Auditor to comment on whether a director is disqualified under section 274(1)(g) 4.1 The newly inserted Section 274(1)(g) provides for disqualification of a person as a director of a public company who has defaulted on some specified acts such as filing of annual returns, repayment of deposits or debentures, etc. This disqualification continues for five years.

4.2 In my view, this is a very inappropriate and even misplaced requirement. An auditor normally checks on those aspects affecting the accounts or arising there from. He does not focus on such contraventions of the Companies Act, 1956, which have been provided for in the amendment act. What is even stranger is that he has to check whether the directors have been so disqualified with regard to other companies where they are or were directors. It is submitted that except from taking representations from each of such directors, he has no practical means of verifying whether any of the directors are affected by such defaults.

5. ConclusionThe conclusion is consistent that while the amendments are well intended, they are half-baked thus creating difficulties, which will continue till such time that the lawmakers remove them by further amendments.