CA > Inter > Paper 2 – Skim Notes

Chapter 9 : Accounts of Companies

Overview

  • Preparation and maintenance of books of account and related requirements in companies.
  • Provisions for the preparation and filing of financial statements and associated matters.
  • Understanding the process for re-opening and revising financial statements under specific circumstances.
  • Knowledge of the structure, functionality, and authority of the National Financial Reporting Authority (NFRA).
  • Insights into Corporate Social Responsibility (CSR) practices and obligations of companies.
  • Understanding procedures related to internal audits within companies.

Key Topics

Preparation of Books of Account (Section 128)

  • Companies must maintain proper books of account at their registered office or designated location, as decided by the board of directors.
  • Books of account must reflect the true and fair view of the company’s affairs, maintained on an accrual basis and using double entry accounting system.
  • Companies are liable for maintaining the records properly for no less than 8 years, with penalties for non-compliance ranging from INR 50,000 to 5,00,000.
  • The term ‘books of account’ includes records related to all financial transactions, sales, purchases, assets, liabilities, and cost items as prescribed by the Companies Act.
  • Sub-section provisions require subsidiary book inspections only upon board authorization, with specific rules for electronic record maintenance.

Deep Dive

  • The double entry system allows for checks and balances, ensuring accuracy in financial reporting.
  • The records need to be preserved even in cases where the company may not exist anymore for a certain period, as determined by the law.
  • Fines can be escalated depending on the severity and nature of non-compliance with accounting standards.

Financial Statements (Section 129)

  • Financial statements must provide a truthful overview of the company’s financial status and comply with relevant accounting standards.
  • Companies are required to submit consolidated financial statements if they have subsidiaries or joint ventures.
  • Any deviation from accounting standards must be disclosed to explain reasons and financial impacts.
  • The approval of financial statements must occur during the annual general meeting and follow specific procedural requirements for filing with the Registrar.
  • Insurance, banking companies, and electricity-generating companies have unique provisions for financial statement requirements.

Deep Dive

  • Consolidated financial statements allow shareholders to see the overall financial health encompassing all subsidiaries rather than standalone metrics.
  • Penalties for non-compliance regarding filing and financial reporting can be significant, including potential imprisonment for specified officers.
  • Section 129 outlines mandatory disclosures including significant legal and operational updates that may affect stakeholders.

Re-Opening of Financial Accounts (Section 130)

  • A company may re-open accounts only via orders from a court or Tribunal if the previous accounts were prepared fraudulently or if there was mismanagement affecting reliability.
  • Re-opening is restricted to a maximum of 8 previous financial years unless directed otherwise by the Central Government.
  • The requirement for a fair representation in financial statements is paramount, ensuring traceability of transactions.
  • Applications for re-opening must be formally made by specified authorities including government agencies, emphasizing the seriousness of the matter.
  • Notifications to financial stakeholders are mandated in the process prior to the order being made.

Deep Dive

  • Such interventions are typically indicative of severe mismanagement or fraudulent activities, thereby protecting shareholders and stakeholders.
  • The law ensures that the integrity of financial reporting can be maintained through structured checks on company statements.
  • Procedures must allow for corporate governance and accountability to be retained through scrutiny of past reports.

Voluntary Revision of Financial Statements (Section 131)

  • Directors may revise financial statements or board reports for up to three preceding financial years with Tribunal approval if compliance issues are discovered.
  • Such revisions should not occur more than once in a financial year and must follow a structured process as guided by central rules.
  • Documentation supporting the changes must be carefully outlined and justified in Board meeting minutes and required notifications.
  • Once approved, relevant reports must be circulated to stakeholders to keep them informed of significant changes.
  • Companies are required to ensure full transparency to maintain trust among shareholders and related parties.

Deep Dive

  • This provides companies a mechanism to rectify past oversights without severe legal repercussions, promoting ethical practices.
  • A clear record of revisions and audience notifications ensure accountability, thereby stabilizing market confidence.
  • The act emphasizes compliance, thereby reiterating obligations for truthfulness in financial disclosures.

Corporate Social Responsibility (Section 135)

  • Companies meeting specific thresholds of net worth, turnover, or profit must constitute CSR committees and mandate spending on CSR activities.
  • The annual targets for CSR spending are set at 2% of average net profits of the last three financial years, or total profits from the period since incorporation if less than three years.
  • CSR activities should align with specified objectives like education, environmental sustainability, and promoting social welfare.
  • Companies need to report CSR activities transparently in their annual reports, detailing project outcomes.
  • Unspent amounts from CSR activities should be either carried over or transferred to specified funds as required.

Deep Dive

  • The legal backing for mandatory CSR positions India as a leader in advocating corporate accountability towards societal via fiscal contributions.
  • The ‘Har Ghar Tiranga’ campaign reflects the flexible interpretation of CSR considering national concerns, especially relevant during COVID-19.
  • COVID-19-related activities significantly shifted CSR priorities, emphasizing urgent health and safety initiatives.

National Financial Reporting Authority (NFRA) (Section 132)

  • The NFRA is established to enforce compliance with accounting and auditing standards and to protect public interest by ensuring high standards.
  • The authority oversees auditors for specific classes of companies and is empowered to initiate investigations regarding accounting misconduct.
  • Regular quality audits are mandated under the authority, promoting transparency in practices across associated stakeholders.
  • The NFRA has quasi-judicial powers to enforce compliance measures and ensure professional conduct in accountancy.
  • The NFRA can impose penalties on auditors or designated professionals found in violation of stipulated regulations.

Deep Dive

  • NFRA plays a crucial role in shaping accounting standards in India, ensuring alignment with global practices when required.
  • The involvement of NFRA in investigations provides a safety mechanism for corporate accountability that is vital as fraud becomes more sophisticated in corporate environments.
  • Special attention to fraud and transparency fosters a nurturing environment for ethical corporate governance.

Internal Audit (Section 138)

  • Specific companies need to appoint internal auditors based on certain predefined thresholds related to paid capital, turnover, and borrowings.
  • Internal audits must follow guidelines as per the prescribed rules, emphasizing performance, accuracy, and compliance with organizational policies and legal regulations.
  • Directors are accountable for ensuring that internal auditors are properly utilized and that audit findings are integrated into overall governance.
  • An internal auditor can be either in-house or from an external body to bring about a true evaluation of a company’s functions and controls.
  • Organized audits facilitate early detection of issues and support strategic decision-making processes.

Deep Dive

  • Audits serve to enhance management accountability and operational effectiveness, mitigating risks in time.
  • Trained internal auditors provide internal assurances and add credibility to organizational processes, improving operational efficiency.
  • Strategic and variated audits can lead to substantial cost-saving and resource optimization within a company’s framework.

Summary

Understanding the provisions outlined in Chapter 9 of the Companies Act, 2013 is crucial for maintaining proper accounting practices within corporations. Companies must prepare and keep accurate books of account, file comprehensive financial statements, and ensure adherence to Corporate Social Responsibility mandates. The establishment of the National Financial Reporting Authority emphasizes the commitment to upholding high standards in accounting and auditing. Through continuous monitoring and audits, along with provisions for revising financial statements, the Act safeguards against misrepresentation in financial reporting, ensuring transparency and accountability in corporate governance.