Previously, it was the practice with most Indian companies to send to the shareholders a copy of the balance sheet and the profit and loss account accompanied by only the briefest possible report from the directors.
Apart from matters dealing with the disposal of profits, i.e., recommendations regarding transfer to reserves and dividends, it was not unusual to come across a report which described the performance as satisfactory considering the circumstances” and gave no other information.
This is clearly unsatisfactory as the shareholders are entitled to get all information which can be safely given to them without prejudice to the company’s future operations.
It is the duty of the directors to describe the conditions prevailing in the industry generally from various points of view—financial, commercial, labour, and taxation—and then to point out the various difficulties which the company encountered during the year and the advantages which the company enjoyed.
The Report should also deal with significant events that have occurred after the close of the financial year for which accounts have been presented, e.g., the effect of new taxes. Also, the Report is the place where likely future developments can be mentioned.
The future benefits of a contract already entered into, for instance, cannot be entered in final statements of accounts—they can only be stated in the Directors’ Report. Also events after the date of the balance sheet have to find a mention in the Directors’ Report.
Suitable statistical information regarding sales, profits, wages and dividends accompanied by suitable graphs (which should be designed with care lest they should give a false impression) should be given. Section 217 of the Companies Act, 1956 makes it compulsory for the balance sheet laid before a company in general meeting to be accompanied by a report by the Board of Directors.
The report must deal with the following:—
(a) The state of the company’s affairs;
(b) The amounts, if any, which the Board proposes to carry to any reserves in such balance sheet;
(c) The amount, if any, which the Board recommends, should be paid by way of dividend;
(d) Material changes and commitments, if any, affecting the financial position of the company which have occurred between the end of the financial year of the company to which the balance sheet relates and the date of the report.
(e) The conservation of energy, technology absorption, foreign exchange earnings and outgo, in such manner as may be prescribed. Refer Companies (Disclosure of Particulars in the Report of Board of Directors) Rules, 1988.
Further, the Board’s report should deal with the following for proper appreciation of the state of the company’s affairs (unless the disclosures will, in the opinion of the Board, harm the company’s business):—
(a) Changes which have occurred during the financial year in the nature of the company’s business;
(b) Similar changes in the company’s subsidiaries or in the nature of the business carried on by them; and
(c) Changes in the classes of business in which the company has an interest.
(d) The name of every employee who (i) if employed throughout the year received a total remuneration of Rs 12,00,000 (w.e.f. 25.10.2000) or more in the year; or (ii) if employed for part of the financial year and was in receipt of remuneration for any part of that year at a rate which in the aggregate was not less than Rs 1,00,000 per month (w.e.f. 25.10.2000) or (iii) if employed throughout the financial year or part thereof received remuneration which, in the aggregate, or as the case may be, at a rate which, in the aggregate, exceeded that drawn by the managing director or whole-time director or manager and held by himself or along with his spouse and dependent children not less than 2% of the equity shares of the company.
The term remuneration has the same meaning as in the Explanation to Sec. 198. It has to be disclosed whether any such employee is a relative of any director or manager of the company; the name of such director must also be stated. Companies normally disclose the job assigned to the employees concerned and also their qualification.
According to section 217(2 AA), the Board’s report is also to include a Directors’ Responsibility Statement, indicating therein—
(i) that in the preparation of the annual accounts, the applicable accounting standards have been followed along with proper explanation relating to material departures;
(ii) that the directors have selected such accounting policies and applied them consistently and made judgements and estimates that are reasonable and pendent so as to give a true and fair view of the state of affairs of the company at the end of the financial year and of the profit or loss of the company for that period;
(iii) That the directors have taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities;
(iv) that the directors have prepared the annual accounts on a going concern basis.
According to section 217(2B), the Board’s report will also specify the reasons for the failure, if any, to complete the buy-back within the specified in sub-section (4) of section 77A. In addition to the above, sub-section (3) of section 217 declares:
“The Board shall also be bound to give the fullest information and explanations in its report aforesaid, or in cases falling under the proviso to section 222 in an addendum to that report, on every reservation, qualification or adverse remark contained in the auditor’s report”.
The proviso to section 222 enables the Board to give information (as is allowed to be given in a statement) annexed to the accounts in the Board’s report itself. To that extent, the report will be considered as annexed to the accounts and will have to be audited.
The report of the directors should be signed by the chairman if he is so authorised but, if he is not, the report has to be signed by the company’s manager or secretary, if any, and by not less than two directors of the company, one of whom shall be the managing director where there is one.
A company must get its accounts audited by qualified auditors. Sections 224 to 233 of the Companies Act deal with appointment, powers and duties of the auditors. The auditors have to report on the accounts, balance sheet and the profit and loss account examined by them.
The report is addressed to the shareholders and it is the duty of the directors to attach the report to the balance sheet so that every shareholder gets a copy of the report.
The report is called clean or clears if it is unqualified. But if the report contains some adverse remarks or remarks to call the attention of the shareholders to certain facts, it is called a qualified report. As seen above, the directors must themselves comment on every reservation, qualification and adverse remarks contained in the report.
Below is given a specimen of an unqualified report:
“We have audited the attached Balance Sheet of ABC Ltd. as on 31st March, 2012, and also the annexed Profit and Loss Account of the company for the year ended on that date and report that:
(1) We have obtained all the information and explanations which to the best of our knowledge and belief were necessary for the purpose of our audit;
(2) In our opinion, proper books of account as required by law have been kept by the company so far as it appears from our examination of the books (and according to the reports of the Branch Auditors where such audit has not been done by us);
(3) The Balance Sheet and Profit and Loss Account dealt with by the report are in agreement with the books of account (and audited returns from branches);
(4) The reports of the Branch Auditors have been forwarded to us and have been considered in preparing our report;
(5) In our opinion and to the best of our information and according to the explanations given to us, the Accounts (together with notes thereon and documents annexed thereto) give the information required by the Companies Act, 1956 in the manner so required and give a true and fair view:
(a) In the case of the Balance Sheet, of the state of the affairs of the company as at 31st March, 2012 and
(b) In the case of the Profit and Loss Account, of the profit (or loss) for the year ended on that date.
In addition, now auditors have to give their remarks on a number of points contained in the Manufacturing and Other Companies (Auditor’s Report) Order, 1975 issued under section 227 (4A) of the Companies Act.