No Relaxation: Companies Have to Spend On CSR Initiatives, Rotate Auditors

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NEW DELHI: It has reported that the corporate affairs ministry has rejected the industry’s demand for a relaxation in the norms on mandatory CSR spending and rotation of auditors outlined in the new Companies Act. A senior official told ET that the ministry has decided to stick to the original draft of rules despite intense lobbying by industry bodies.

The new Companies Act, which replaces the Companies Act of 1956, requires firms above a certain threshold to spend 2% of their average net profit on so-called corporate social responsibility (CSR) initiatives. The Act also requires companies to rotate the auditors they use periodically.

The corporate affairs ministry is of the view that rules under the new Companies Act have been carefully drafted and, therefore, do not require any significant change.

“There is no need for major changes. We have already sent some of the drafts to the law ministry for vetting,” the official quoted earlier said.

Industry bodies have been vocal in their criticism of the proposed rules. In their interactions with corporate affairs minister Sachin Pilot, industry associations had pressed for scrapping of the rule on mandatory rotation of auditors for unlisted companies.

Auditor rotation rules have been prescribed but they do not seem to consider the size of companies based on turnover or any measure of profit and loss account, but on the basis of balance sheet items.

The other major concern seems to be the threshold of 2% CSR spend by companies in a year. According to the Companies Bill, 2013, companies with a net worth of 500 crore or more, a turnover of 1,000 crore or more, or a net profit of 5 crore or more in a financial year are mandated to spend 2% of their profit towards corporate social responsibility.

Industry had also sought relaxation and clarity on corporate governance; restriction on layers of subsidiaries; constitution of National Financial Reporting Authority, its oversight; appointment of auditors including mandatory firm rotation, limits on the number of audits; clauses on independent directors and the manner of their selection; power to compromise or make arrangements with creditors and members; merger and amalgamation of companies.

“For big companies, audit firms need a specific infrastructure for rotation of auditors. We as an audit firm will also face problems if we shift from a small to a big account at a specific location,” said Atul Dhawan, partner at Deloitte Haskins & Sells.

The retrospective implementation of the clause pertaining to rotation of auditors has particularly irked the industry.

The new law mandates companies to rotate their auditor after five years in case of an individual auditor and after two terms of five years each in case of an audit company.

(Economic Times, 25 November 2013)

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