How an Auditor reports disqualification of director in Audit Report?

Short Summary

How do you know a director is disqualified?

Section 164(2) enumerate conditions for the disqualification of the director.

A director can be disqualified under Section 164 of the Companies Act, 2013 for the following reasons:

• The Director is of unsound mind and stands so declared by a competent court.
• The Director is an undischarged insolvent.
• The Director has applied to be adjudicated as an insolvent and his application is pending.
• The Director has been convicted by a court of any offence, whether involving moral turpitude or otherwise, and sentenced in respect thereof to imprisonment for not less than six months and a period of five years has not elapsed from the date of expiry of the sentence. Also, any person who has been convicted of any offence and sentenced to imprisonment for a period of seven years or more, will not be eligible to be appointed as a director in any company.
• An order disqualifying the Director for appointment as a director has been passed by a court or Tribunal and the order is in force.
• The Director has not paid any calls in respect of any shares of the company held by him, whether alone or jointly with others, and six months have elapsed from the last day fixed for the payment of the call.
• The Director has been convicted of the offence dealing with related party transactions under section 188 at any time during the last preceding five years.
• A company in which the Director is a part of the Board has not filed financial statements or annual returns for any continuous period of three financial years.
• The company has failed to repay the deposits accepted by it or pay interest thereon or to redeem any debentures on the due date or pay the interest due thereon or pay any dividend declared and such failure to pay or redeem continues for one year or more.

As mentioned in point 8, a person can be disqualified from being a Director, if the company on which the person is a Director has not filed MCA annual return for a continuous period of three years.

Under Section 164 of the Companies Act, a person disqualified from being a Director will not be eligible for being appointed as Director in any company for a period of 5 years.

Questions: What is the responsibility of an auditor in respect of the reporting of the disqualification of the Director in an Audit Report?

Legal Provision:

As per Section 143(3)(g), The Auditor’s report shall also state, whether any director is disqualified from being appointed as a director under sub-section (2) of Section 164.

Step – I: How auditor shall check whether a Director is disqualified or not?

There are following ways to check the same:

1. Obtain DIR-8 from the directors of the Company every year before the audit.

   DIR-8: DIR-8 is a declaration by directors that they are not disqualified to continue as a director of the company or not disqualified to be appointed as a director.

2. Check the status of the directorship of the Director on MCA website and then check whether all the companies in which such person is a director have completed their annual filing with the ROC or not.

Step – II:

Basedon a declaration from the directors in DIR-8 and by analysing the MCA website, the Auditor shall conclude whether the director is disqualified or not. If all the directors are non- disqualified, the auditor can report the same simply in the audit report.

Step – III: if any director is disqualified then how to report the same in the Audit Report?

As per the requirement of Section 143(3)(g), the auditor shall specifically mention in its audit report about disqualification of Director.

The Auditor shall mention the followings in its auditor report:

• Name of the Disqualified Director;
• Date of Disqualification;
• Reason of disqualification of Director;

Conclusion:

One can opine that It shall be the duty of statutory auditor of the appointing company as well as disqualifying company, as required under Section 143(3)(g) to report to the members of the company whether any director is disqualified from being appointed as a director and to furnish a certificate each year as to whether on the basis of his examination of the books and records of the company, and director of the company is disqualified for appointment as a director or not.

Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice from Delhi and can be contacted at csdiveshgoyal@gmail.com).

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