The Companies Act, 2013 is a crucial legal framework that regulates the incorporation, responsibilities and the operations of companies operating in India. One of the most important but frequently overlooked sections are the Section 142 that deals specifically with the payment for auditors. Though it’s a little rambling in its terms, this section serves an essential role in ensuring fairness and transparency in the financial reporting industry.
If you’re considering company registration or you already have a registered company, understanding Section 142 is crucial to ensure compliance and a smooth corporate governance.
What is Section 142 of Companies Act, 2013?
Section 142 sets out the rules for the payment of remuneration to the company’s auditors. The primary purpose in this chapter is to determine who is the person who decides the auditor’s fee and what can be included in the compensation.
Here’s a full detail of what the section covers:
1. Fixation of Auditor’s Remuneration
Section 142(1) stipulates that the compensation of an auditor in an organization must be set at its annual general assembly or in the manner that the company’s its general meeting decides. This will ensure that the appointment as well as payment decision related to the auditor’s appointment are made with the participation of shareholders, thus ensuring the independence of the auditor.
In simple terms the shareholders, at the general meeting will choose to:
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Choose the precise amount of compensation or
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Transfer the authority to specified authority, for example for instance, the Board of Directors, to determine the amount.
This provision applies regardless of whether the auditor is appointed pursuant to section 1339 (initial selection of the auditor) or not.
2. What Does Remuneration Include?
Article 142(2) clarify it is clear that “remuneration” includes the costs incurred by the auditor as a result of his audit for the business and any facility that is granted to him however it does not include payment for any other services provided by him on behalf of the business.
For instance:
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Included: Audit fees, travel expenses for audit, stationery, etc.
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Not included: Costs for tax consultation and management advisory services or legal advice provided by the auditor on a separate basis.
This distinction is crucial for compliance with corporate governance and auditing regulations. It also prevents confusion or misuse regarding the auditing role.
Practical Implications for Businesses
Knowing and complying with Section 142 is vital to keeping financial transparency in check and avoiding regulatory concerns. Let’s look at how it affects businesses, especially in the course of or following the company registration procedure:
a. Clear Governance
The fixation of auditor remuneration at the general meeting is a good example of management practices and provides confidence to stakeholders and shareholders of transparency in the financials.
b. Avoiding Conflict of Interest
In separating audit-related fees and services that are not audit-related Section 142 makes sure that the auditor is independent and impartial, and free of any conflicts of interests.
c. Legal Compliance
Failure to comply with the auditor-related requirements such as their remuneration could result in sanctions in the Companies Act, and may also impact the reputation of your business and its creditworthiness.
Importance During Company Registration
When it comes to the Company Registration process, specifically for private limited corporations and corporations that are public, selection of the first auditor has to occur within 30 days after incorporation (as in the Section 139). Then, the companies are required to adhere to the guidelines of Section 142 to determine the amount of remuneration at their general meetings.
This is a reference to:
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Each newly registered business must include a discussion about the cost of auditors in its first annual General Meeting (AGM).
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If this step is not completed this step can be flagged during future audits or reviews of compliance.
This is why it’s recommended to speak with an Top CA Firm to manage your company’s registration, audit appointments and other compliance issues seamlessly.
How the Best CA Firm Can Help
No matter if you’re starting your own company or operating an established company, a Top CA firm will assist you in:
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Drafting AGM resolutions to fix the auditor’s pay.
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Separation between audit and non-audit service billing.
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Beware of penalties by filing timely in your Registrar of Companies (ROC).
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All-inclusive Corporate Registration and post-registration registration compliance.
With a thorough understanding about the Companies Act, a trusted CA firm will ensure that your company is operating within the legal framework, while maintaining transparency in financial reporting and compliance.
Conclusion
Although Section of Section 142 of the Companies Act, 2013 may seem tinny and technical however, it is of immense importance in the field of corporate governance. The fix of auditor compensation with shareholder approval not only protects the auditor’s independence, but also enhances the credibility of the company.
If you’re launching an Corporate Registration or re-evaluating your corporate procedures, ensuring compliance to Section 142 is not a matter of negotiation. To be sure you’re on the correct part of law you should to speak with the best CA firm that is knowledgeable of the intricacies of corporate law and can assist you in every step with precision.
