CAs' panel points finger at surrogate auditing

Polaris 'has violated Companies Act, Contract Act' says CAAC's S Gurumurthy

The CAAC (Chartered Accountants Action Committee) has fired its first salvo against corporates in India using surrogate entities of multinational accounting firms to audit its book of accounts.

S Gurumurthy, convener, CAAC has written to the secretary, Department of Company Affairs, pointing out that the Chennai-based Polaris Software Labs has violated the Companies Act and the Contract Act by naming some Big Four consulting firms as approved auditors in its Articles of Association.

Gurumurthy's letter to the DCA, a copy of which is available with Business Standard, points out that, Polaris has amended its Articles of Association regarding appointment of Statutory Auditors under Section 224 of the Companies Act, 1956, by naming select firms to carry out audit functions.

The letter said that the amendment was in violation of the provisions of section 224 of the Companies Act, 1956 and also infringed upon the right of the shareholders in appointing statutory auditors of the company.

Polaris has in its Articles of Association, defined the term approved auditors as KPMG, PricewaterhouseCoopers, Ernst & Young and Deloitte Touche & Tomahatsu.

The company in its Articles of Association, has also included a residuary clause which includes any internationally recognised firm of auditors approved by the prime shareholders from time to time.

Polaris in its articles of association, while defining the term approved auditors has included the phrase, where appropriate, their associate firms in India. Polaris s books are at present audited by Bharat S Raut & Co, an associate of KPMG.

The amendments put through by the company are clearly void under section 23 of the Contract Act as being against public policy and also as being unlawful as KPMG and Ernst and Young are not audit firms within the meaning of the ICAI regulations and therefore not entitled to be appointed as auditors of the company. Gurumurthy has said in his letter.

While clarifying the term any internationally recognised firm and need for restricting the list of auditors to the Big Four, a Polaris spokesperson said, "Just as we have benchmarking standards for many of our other operational areas, we have set benchmarks and standards for selecting auditors. It is a standard practice among large organisations around the world, including India, to retain one of the Big Four international audit firms (or their associates, where applicable) to examine and certify their book of accounts."

The Polaris spokesperson further said, It is not really an issue of listing multinational versus Indian firms in the Articles.

We have simply listed firms that we believe will meet the high audit standards expected of them in examining and certifying our book of accounts.

But according to P H Arvindh Pandian, a leading attorney specialising in Company Law said, restricting the number of firms being mentioned in the Articles of Association takes away these powers vested in the shareholders, which is not in their interest.