Accounts of Companies

(d) Accounts of Companies

Books of Account — Section 128: every company must keep proper books of account at its registered office, on an accrual basis and according to the double-entry system, giving a true and fair view of the state of its affairs, including that of its branch offices. These books (along with the vouchers relevant to any entry) must generally be preserved for at least eight financial years.

Financial Statements — Section 129: the company's financial statements must give a true and fair view of its state of affairs and comply with the applicable Accounting Standards. A company's financial statements comprise: the Balance Sheet, the Statement of Profit and Loss (or an Income and Expenditure Account, for a company not carrying on business for profit), a Cash Flow Statement, a Statement of Changes in Equity (where applicable), and any explanatory notes annexed to the above.

Periodical Financial Statements: financial statements are prepared for every financial year and must be laid before the members at the company's Annual General Meeting (AGM), in accordance with Section 129(2). Where a company has one or more subsidiaries, Section 129(3) additionally requires it to prepare Consolidated Financial Statements, in addition to its own standalone statements.

Internal Audit — Section 138: certain prescribed classes of companies (every listed company, and other companies crossing prescribed thresholds of turnover, outstanding loans/borrowings, outstanding deposits, or paid-up share capital, under the Companies (Accounts) Rules, 2014) must appoint an internal auditor — who may be a chartered accountant, a cost accountant, or such other professional the Board decides — to conduct an internal audit of the company's functions and activities. Internal audit is a management-appointed, ongoing review, distinct from the independent statutory audit described below.

Auditor — Appointment (Section 139): the first auditor of a company (other than a Government company) is appointed by the Board of Directors within 30 days of incorporation (failing which, the members must appoint one within 90 days at an extraordinary general meeting). Every subsequent auditor is appointed by the members at an AGM, and holds office from the conclusion of that meeting until the conclusion of the sixth AGM thereafter — effectively a 5-year term — subject to the rotation requirements applicable to listed and certain other prescribed companies.

Auditor — Eligibility (Section 141): only a person holding a valid certificate of practice as a Chartered Accountant (a member of the Institute of Chartered Accountants of India) is eligible for appointment as a company's auditor; a firm (including an LLP) is also eligible if the majority of its partners practising in India are themselves qualified Chartered Accountants — in which case only the qualified partners may sign on the firm's behalf. Section 141 also lists specific disqualifications — a person is NOT eligible if they are, for instance, an officer or employee of the company, hold securities/financial interest in the company beyond a prescribed limit, are indebted to the company beyond a prescribed amount, have already been convicted of fraud in the preceding ten years, or are already the auditor of the maximum number of companies the Act permits. …