Companies Act Section 378ZG

Companies Act, Section 378ZG: Duties of Auditor under Chapter XXIA: Special Reporting Responsibilities in the Case of Producer Companies

To strengthen financial accountability, promote transparency, and ensure that the unique nature and operations of Producer Companies are subjected to robust financial scrutiny, Section 378ZG of the Companies Act, 2013, lays down a set of additional responsibilities for auditors of such companies.

These duties are in addition to the general powers and responsibilities conferred upon auditors under Section 143 of the Companies Act, which governs statutory audits for all companies. Section 378ZG is tailored to address the specific characteristics, risks, and stakeholder structures associated with Producer Companies, which are often cooperatively owned and managed by primary producers such as farmers, artisans, and rural entrepreneurs.

1. Overarching Obligation

The provision begins with the phrase “without prejudice to the provisions contained in section 143”, which means that the duties described in Section 378ZG are to be performed in addition to the general auditing functions outlined under Section 143. This includes:

Expressing an opinion on whether the financial statements present a true and fair view of the state of affairs, examining books and vouchers, reporting on fraud, if any, and ensuring compliance with accounting standards and other legal requirements.
Beyond these standard obligations, the auditor of a Producer Company is required to specifically examine and report on the following additional matters:

(a) Debts Due and Particulars of Bad Debts

The auditor must review and report the total amount of debts due to the Producer Company, including:

Trade receivables, loans advanced, overdue payments from members, customers, or third parties.
The report should also clearly identify and describe any bad debts, i.e., amounts that are no longer considered recoverable. The identification of bad debts is crucial for:

Evaluating the credit risk exposure of the company, making appropriate provisions in the accounts, and ensuring accurate reflection of net assets.
(b) Verification of Cash Balances and Securities

The auditor is required to physically verify the cash balance held by the Producer Company and confirm the existence and value of any securities or financial instruments owned. This includes:

Cash in hand, Bank balances, Fixed deposits, Bonds, shares, or other investments. Verification ensures that:

There are no fictitious or misreported balances, company funds are not being misappropriated or diverted, and the liquidity position is properly understood by the stakeholders.
(c) Details of Assets and Liabilities

The audit report must include comprehensive details of all assets and liabilities of the Producer Company. This entails:

Identifying fixed assets such as land, buildings, plant, machinery, and vehicles.
Recording current assets including inventories, receivables, and prepaid expenses.
Documenting liabilities such as borrowings, trade payables, outstanding dues, and provisions.
This disclosure is essential for assessing the true financial health and solvency of the Producer Company and helps members and regulators make informed decisions.

(d) Transactions Contrary to the Provisions of this Chapter

The auditor is specifically tasked with identifying and reporting any transactions undertaken by the Producer Company that appear to be contrary to the provisions of Chapter XXIA of the Companies Act (the chapter that deals with Producer Companies). These may include:

Improper distribution of patronage bonus or dividends, Unauthorized transactions with non-members, Non-compliance with the internal governance provisions prescribed in the Act or Articles of Association, Breaches in limits imposed on loans, donations, or use of funds.
This duty serves to protect the interests of the producer-members and ensure that the company is operating within its legal and cooperative framework.

(e) Loans Given to Directors

The auditor must report any instances where loans or advances have been given by the Producer Company to any of its directors. This includes:

Direct loans, Indirect financial benefits, Loans through associate or related entities.
Such transactions are sensitive from a governance and conflict-of-interest standpoint and must comply strictly with statutory restrictions under the Act. Unauthorised or non-transparent lending to directors can be considered a breach of fiduciary duty and may attract legal consequences.

(f) Donations or Subscriptions Given by the Producer Company

The auditor is also required to verify and report any donations or subscriptions made by the company during the audit period. This includes:

Contributions to political, social, or charitable organizations, Sponsorships and grants, Donations to member-related or external causes.
Such transactions must be lawful, approved as per the Articles of Association or Board resolutions, and consistent with the objectives of the Producer Company. Reporting ensures that such payments are not misused for personal benefit or political gain.

(g) Other Matters Considered Necessary by the AuditorYoutube

In addition to the specific items listed above, the auditor is empowered to report any other matter that they consider necessary in the interest of the company, its members, or in furtherance of legal compliance and good governance. This includes:

Suspected fraud or mismanagement, Material inconsistencies in financial reporting, Breaches of internal controls or operational inefficiencies, Conflicts of interest or self-dealing by key managerial personnel.
This discretionary power ensures that auditors are not limited in scope and can exercise professional judgment to highlight material concerns, even if not explicitly mentioned in the law.