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Feb 7, 2024

How to Avoid Legal Liabilities as an Auditor under the Companies Act 2013

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Divyesh Gamit

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As an auditor, you have a crucial role in ensuring the accuracy and reliability of the financial statements and reports of the company. You also have to follow the professional standards and ethical principles of auditing. However, you may also face legal liabilities under the Companies Act 2013, if you fail to perform your duties or act fraudulently or negligently. In this blog post, we will explain the types of legal liabilities of an auditor that you may face as an auditor under the Companies Act 2013, and how to avoid them.

Types of the Liabilities of an Auditor

The liabilities of an auditor under the Companies Act 2013 can be broadly classified into two types: criminal liabilities and civil liabilities.

Criminal Liabilities of an Auditor

The criminal liabilities for the auditor arise when the auditor commits a crime under the Companies Act 2013 or any other law and is punishable with imprisonment, fine, or both. Some of the crimes that may cause criminal liabilities for the auditor are:

  • Making a false representation in a prospectus or in any other document that the Companies Act of 2013 or its regulations require.
  • Fraud being committed, encouraged, or coordinated by the business, its officers, or directors.
  • Violating the provisions of the Companies Act 2013 or the rules made thereunder relating to the appointment, qualifications, rotation, remuneration, resignation, removal, reporting, or disclosure of the auditor.
  • Signing or authenticating any financial statement or report or certificate that does not comply with the accounting standards or auditing standards or the Companies Act 2013 or the rules made thereunder.
  • Failing to report any material misstatement, fraud, or violation of the Companies Act 2013 or the rules made thereunder that he has noticed or has reason to believe in the course of his audit.
  • Failing to comply with the directions or orders of the National Financial Reporting Authority (NFRA) or the Central Government or the Tribunal or the Registrar or any other authority under the Companies Act 2013.

The criminal liabilities of an auditor may also affect the audit firm and its partners if the crime is committed by the auditor in the name of the audit firm or with the consent or connivance of the audit firm or its partners.

The penalty for the criminal liabilities for the auditor may vary depending on the nature and severity of the crime, but it may include imprisonment for a term ranging from six months to ten years, and a fine ranging from one lakh rupees to five times the amount involved in the fraud.

Civil Liabilities of an Auditor

Civil liabilities for the auditor arise when the auditor causes any loss or damage to the company or its shareholders or creditors or any other person, due to his negligence or breach of duty or contract or trust. The civil liabilities of an auditor may be based on the following sources:

  • The Companies Act 2013 or the rules made thereunder.
  • The contract between the auditor and the company or its shareholders or creditors or any other person.
  • The tort law or the common law principles of negligence or breach of trust or fiduciary duty.

The civil liabilities for the auditor may also affect the audit firm and its partners if the loss or damage is caused by the auditor in the name of the audit firm or with the consent or connivance of the audit firm or its partners.

The remedy for the civil liabilities for the auditor may vary depending on the source and extent of the liability, but it may include compensation or damages or injunction or declaration or specific performance or rescission or restitution or any other relief as may be granted by the court or the tribunal or any other authority.

The legal liabilities of an auditor under the Companies Act 2013 may have serious consequences for the auditor, both professionally and personally. The auditor may face the following consequences:

  • Loss of reputation and goodwill in the market and among the clients and peers.
  • Loss of income and business opportunities due to the cancellation or termination of the audit contracts or engagements.
  • Loss of membership or license or registration or recognition or qualification as an auditor or a chartered accountant.

Therefore, the auditor needs to avoid legal liabilities as much as possible. Here are some tips to help the auditor avoid legal liabilities under the Companies Act 2013:

  • Be aware of the provisions of the Companies Act 2013 and the rules made thereunder, especially those relating to the auditor and the audit process.
  • Be familiar with the accounting standards and auditing standards applicable to the company and the audit.
  • Be independent and objective in performing the audit and expressing the audit opinion.
  • Be diligent and careful in collecting and verifying the audit evidence and documenting the audit work.
  • Be honest and truthful in reporting and disclosing the audit findings and observations.
  • Be alert and proactive in identifying and reporting any material misstatement, fraud, or violation of the Companies Act 2013 or the rules made thereunder.
  • Be cooperative and responsive in complying with the directions or orders of the NFRA or the Central Government or the Tribunal or the Registrar or any other authority under the Companies Act 2013.
  • Be prudent and cautious in signing or authenticating any financial statement or report or certificate related to the audit.
  • Be transparent and accountable in communicating and dealing with the company and its shareholders and creditors and any other person related to the audit.

By following these tips, the auditor can avoid legal liabilities under the Companies Act 2013 and perform his duties with confidence and integrity.

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