Who is a Statutory Auditor?

A statutory auditor plays a crucial role in ensuring that a company’s financial statements are true, fair, and comply with the regulatory framework set by law. The role is not just about checking the accuracy of financial data, but also about safeguarding public interest, ensuring corporate governance, and maintaining transparency.

This article aims to explain the role, importance, qualifications, responsibilities, and legal framework surrounding statutory auditors, particularly in the context of Indian laws and regulations.

What is a Statutory Auditor?

A statutory auditor is a qualified professional appointed to examine and audit a company’s financial records as per the legal requirements set out in the relevant statutes. In India, statutory auditors are appointed under the Companies Act, 2013, and other applicable laws such as the Income Tax Act, 1961, for tax audits.

Unlike internal auditors, who are employees of the company, statutory auditors are independent third parties responsible for reviewing the financial statements of the company and ensuring compliance with accounting standards and legal obligations. Their primary objective is to provide an unbiased opinion on the accuracy of the company’s financial reports, which include the balance sheet, profit and loss statement, and cash flow statements.

Legal Framework for Statutory Auditors in India

In India, the role of statutory auditors is defined primarily under the Companies Act, 2013. The Act mandates that every company, other than a one-person company (OPC), must appoint a statutory auditor. The provisions relating to auditors are found in Section 139 to Section 148 of the Companies Act, 2013.

Under this Act:

• Section 139 outlines the appointment of auditors, specifying that they should be appointed by the shareholders in the annual general meeting (AGM) for a period of one year, and their appointment must be ratified annually.
• Section 143 defines the powers and duties of auditors. It provides that the statutory auditor must audit the company’s accounts and express an opinion on whether the financial statements give a true and fair view of the state of affairs of the company.

Additionally, the Income Tax Act, 1961 also requires a statutory audit of a business entity’s books if its turnover exceeds a specified limit.

Qualifications of a Statutory Auditor

In India, the statutory auditor must be a chartered accountant (CA), and the audit firm or individual must be registered with the Institute of Chartered Accountants of India (ICAI). Chartered accountants must have passed the prescribed examinations and acquired practical experience in auditing.

Under the Companies Act, the qualifications and eligibility of auditors are clearly defined:

• A person who is a member of the ICAI and holds a valid certificate of practice is eligible to act as a statutory auditor.
• The company may appoint an individual or a firm of auditors, but the firm must have at least one partner who is a CA.

Other Legal Considerations:

• The auditor should not be a director or an officer of the company, nor should they have any financial interest in the company. This ensures their independence.
• The auditor should not have a direct or indirect relationship with the company being audited.

Responsibilities of a Statutory Auditor

The statutory auditor’s primary responsibility is to examine the financial statements of the company and report whether they comply with the accounting standards and legal requirements. However, the auditor’s responsibilities extend beyond just verifying financial records.

Verifying Financial Statements

The statutory auditor’s most important responsibility is to verify whether the financial statements, such as the balance sheet and profit and loss account, present a true and fair view of the company’s financial position.

Compliance with Accounting Standards

The auditor ensures that the company has adhered to the prescribed Indian Accounting Standards (Ind AS) or Accounting Standards (AS) set by the Institute of Chartered Accountants of India (ICAI). The auditor reviews the company’s accounting policies and methods to ensure they are in compliance with the standards.

Reviewing Internal Controls

A statutory auditor assesses the effectiveness of the company’s internal control system. This involves checking whether the company has implemented adequate processes to prevent fraud, errors, and mismanagement. Though they don’t directly audit internal controls, statutory auditors evaluate their impact on the financial statements.

Checking for Fraud and Misstatement

Statutory auditors are required to look for any fraud or misstatements in the financial records. While they are not forensic auditors, they must ensure that there is no significant fraud, errors, or misstatements in the financial documents.

Reporting to Shareholders

After completing the audit, the statutory auditor issues an audit report that is presented to the shareholders in the annual general meeting (AGM). This report should express an opinion on the fairness of the company’s financial statements. The auditor can issue three types of reports:

• Unqualified Report: If the financial statements present a true and fair view without any issues.
• Qualified Report: If the auditor identifies any discrepancies that don’t materially affect the overall financial position.
• Adverse Opinion: If the financial statements are misleading and do not provide a true and fair view.
• Disclaimer of Opinion: If the auditor is unable to form an opinion due to a lack of sufficient information.

Providing Recommendations

In their report, auditors may also suggest improvements in the company’s accounting practices, internal controls, or overall governance. While these suggestions are not legally binding, they provide useful guidance for the company’s management.

Importance of a Statutory Auditor

The statutory auditor serves as an important safeguard for businesses, regulators, and investors. Their role can be summarised as follows:

• Enhancing Credibility: The audit gives stakeholders, including investors, employees, and regulators, confidence in the company’s financial health. It helps ensure that the financial statements are free from manipulation or errors.
• Ensuring Legal Compliance: Auditors help ensure that the company complies with various statutory provisions, including the Companies Act, 2013, and other applicable laws such as the Income Tax Act. This helps prevent legal disputes or penalties due to non-compliance.
• Protecting Shareholders and Public Interests: As independent third parties, auditors ensure that the company’s financial statements are fair, thus protecting the interests of shareholders and the public.
• Facilitating Financial Transparency: By providing an independent review of financial records, statutory auditors ensure that the company operates transparently, which is crucial for building trust and accountability.

Appointment and Tenure of Statutory Auditors

The appointment of statutory auditors is typically done at the company’s annual general meeting (AGM) for a term of one year. The appointment is subject to ratification by the shareholders, and the auditor holds office until the conclusion of the next AGM. However, under the Companies Act, 2013, the term of appointment can be extended for a maximum of two consecutive terms of five years each.

After the term is completed, the company must rotate the auditors to maintain independence. This practice of auditor rotation aims to prevent the auditor from becoming too familiar with the company, which could compromise their independence.

Challenges Faced by Statutory Auditors

While the role of a statutory auditor is crucial for ensuring corporate governance, auditors often face challenges that can complicate their work:

• Pressure from Management: At times, company management may exert undue pressure on auditors to overlook discrepancies or manipulate financial statements. This can compromise the independence of the audit.
• Complex Financial Structures: In companies with complex financial structures or international operations, auditors may face difficulties in auditing various branches, subsidiaries, and transactions.
• Regulatory Changes: Statutory auditors must stay updated with frequent changes in accounting standards, tax laws, and other regulations. Keeping pace with these changes can be challenging, especially for smaller audit firms.
• Time Constraints: Auditing large companies with voluminous records within the time constraints imposed by the AGM schedule can be a demanding task for auditors.

Conclusion

A statutory auditor is a key player in maintaining the integrity of a company’s financial reporting. The role, as defined under Indian law, goes beyond just auditing financial statements; it involves ensuring compliance with accounting standards, assessing internal controls, identifying fraud, and enhancing transparency.

While the job of a statutory auditor is fraught with challenges, the importance of their work cannot be overstated. By providing an independent and unbiased opinion on a company’s financial position, statutory auditors play a pivotal role in promoting trust, transparency, and accountability in corporate India. Therefore, businesses must appoint competent and ethical auditors who can carry out their duties in accordance with the law and uphold the best interests of all stakeholders.