Talking Tough: MCA Recommends ‘Guidance Notes’ For wp Auditors

Corporate Social Responsibility should not become a cosmetic tool or a brand-building exercise – that’s the main concern of the government and the primary motivation in drafting the new wp provisions.

Under the New Companies Law, certain class of profitable entities are required to spend at least 2% of their three-year annual average net profit towards Corporate Social Responsibility (wp) activities but at this stage, even the government is not sure about how it would monitor the wp spend of these companies. Several questions regarding just how the government will do this have already been confronting the Minister of State for Corporate Affairs Nirmala Sitharaman in Parliament.

Though the government has said that it would be premature to form any opinion at this stage, the biggest concern is whether companies will resort to loopholes in the Act to avoid wp spending. Some members of Parliament have expressed fear that the companies may adopt covert modalities to escape from the mandatory spend.

The Finance ministry has already said it will adopt strong monitoring measures from next year, depending on data and opinions that come in from the current year of implementation. Sitharaman added, “The main monitoring mechanism envisaged under the Companies Act is through observations of statutory audit for which the Institute of Chartered Accountants (ICAI) is developing ‘guidance notes’ so that auditors could adequately examine this issue.”

Sitharaman further stated in her written reply to Parliament, “Issues like expenditures incurred by companies on wp and shortfalls, if any, could also be addressed after the first year is over and statutory returns are available with the Ministry of Corporate Affairs.”

As punitive action for non-compliance has been dropped from the Act, it is clear that statutory audit will be the main tool to monitor compliance with provisions of the Act. Whether the government will strengthen vigilance and adopt strict measures against those who try to skirt compliance, remains to be seen.