Appointment of statutory auditors by Company Law Board ‑ Fixation of audit fees ‑ Guidelines for - Companies Law - Circular : No. 7/76

Circular : No. 7/76[1/1/76 ‑ CL ‑ V and 8/3/75 ‑ IGC], dated 8 ‑ 4 ‑ 1976. Subject:- Appointment of statutory auditors by Company Law Board ‑ Fixation of audit fees ‑ Guidelines for In case of Government companies, the statutory auditors are appointed by the Company Law Board in consultation with the Comptroller and Auditor General of India in terms of section 619. So far as their remuneration is concerned it is solely decided and fixed by the Company Law Board on the basis of the recommendations made by the board of directors of the company and in the light of factual merits of each case. It has, however, been observed that a number of representations are received every year from the auditors generally complaining about the inadequacy of the remuneration fixed by the Company Law Board. These representations, by and large, point to the need for fixing some norms, which may be followed uniformly by the Government companies while sending their recommendation to us so as to avoid discrimination and disparity in making a proper assessment of a reasonable remuneration. It has, therefore, been considered necessary to issue guidelines for Government companies regarding fixation of director s remuneration, a copy of which is enclosed for information and necessary action in determining the remuneration reasonably in accordance with the norms specified therein and recommending the same to this Board for consideration as and when the occasion arises. ANNEXURE ‑ GUIDELINES FOR GOVERNMENT COMPANIES REGARDING FIXATION OF AUDITORS REMUNERATION While recommending the remuneration of the auditors, the board of directors of the company concerned should take a comparative view of the affairs of the company, so as to assess whether there has been any significant growth in its activities since the preceding year. Where, however, the same fee has been continued to be paid to the auditors during the past few years, the comparative view of its activities may be taken into account since the period when the fee was last fixed or revised. The following items of income, expenditure and other aspects mentioned below should, inter alia, be taken into account for determining the extent of growth of the activities of a company: 1. Production/Sales in terms of quantity and money value. 2. Other substantive income. 3. Purchases in terms of quantity and money value. 4. Total revenue expenditure. 5. Capital employed (i.e., aggregate of paid‑up capital, reserves and surplus and long‑term liabilities, as reduced by the debit balance in miscellaneous expenditure and profit and loss account). 6. Fixed assets acquired. 7. Total investments, together with number and amount of transactions involved, where a company is engaged in promotion of industries and participates in the shares, stocks, debentures or other securities of joint stock companies or is otherwise an investment company within the meaning of proviso to sub‑section (1) of section 372. 8. Total loans and advances made, together with number and amount of transactions involved, where a company is engaged in rendering financial assistance to various types of industries or dealing in hire‑purchase business. 9. Total number of vouchers (cash and journal) both with respect to accounts maintained at head office and at branches, units, project sites, etc. 10 . Whether the company has decentralised the system of maintaining the accounts, if so, whether it is necessary for the auditors to visit those places for auditing the accounts if maintained there. 11. Time spent by the auditors and their staff in terms of man‑hours (partner and assistant‑wise) in completing the audit. 12. Whether internal audit system is in vogue; if so, this fact may be taken into account and the quantum of remuneration should be comparatively less than in a case where such a system does not exist. 13. Whether the auditors of the company are required to submit a supplementary report to the Comptroller and Auditor General of India in terms of section 619 ? As this results in additional work for the auditors, this may also be taken into account while recommending their remuneration. The above guidelines would normally apply to cases where the recommendation of the board of directors is given after the close of the financial year for which the fee is to be fixed by the Company Law Board. However, in all these cases where a fee is to be fixed for current financial year which has not yet ended, the company concerned should assess the work-load of the auditors on the basis of volume of activities expected during that year, in the same manner as indicated above, and then suggest the quantum of fee that may be sanctioned by the Company Law Board. Where a company has more than one unit/ branch/project site and the books of account, if maintained there are also to be audited, the remuneration of the statutory auditors/branch auditors should be so recommended by the board of directors that the element of TA/DA and other incidental out‑of‑pocket expenses, where necessary, is kept separate from the substantive remuneration. In other words, the remuneration will be fixed on substantive basis . The TA/DA and other out‑of‑pocket expenses may be paid as mutually agreed between the auditors and the company. No such expenses should, however, be allowed in case audit is conducted by a local firm of auditors. As for the remuneration for the work required to be done under any other statute (other than under the Companies Act), the same may be paid to the auditors under the head Charges for other services as mutually agreed to between them and the company. In case of first year audit, the remuneration of the auditors should be based on the minimum of the expected/ budgeted activities of the company which may inter alia include the acquisition of block assets so that the excessive fee is not paid. Similar practice may be followed in a case where project is still in progress and the production has not yet started, or where a new company has been formed to take over a running business. It should, however, be borne in mind by the company that the remuneration proposed by them is commensurate to the work done or to be done by the auditors and it should be ensured that the increase in the fee, if any, recommended by them, is reasonably and fully justified.