Board's Report Under Section 134: Contents, Signing and Penalty

Every company that lays financial statements before its members in general meeting must attach a report by its Board of Directors. Section 134 of the Companies Act, 2013 deals with five things: how the financial statements are approved and signed, what the auditor's report attaches to, what the Board's report must contain, who signs that report, and what happens on default. A gap in any one leaves the annual set incomplete and exposes the company and its officers to a penalty.

Legal basis: Companies Act, 2013, s.134(1) to (8), as currently in force.

The financial statement is approved first, then signed

Section 134(1) says the financial statement, including consolidated financial statement, if any, "shall be approved by the Board of Directors before they are signed on behalf of the Board". It is then signed by:

the chairperson of the company, where the Board has authorised him; or
two directors, one of whom must be the managing director, if any; and
the Chief Executive Officer, the Chief Financial Officer and the company secretary, "wherever they are appointed"; or
in the case of a One Person Company, only one director.

The signed set goes "for submission to the auditor for his report thereon" (s.134(1)). The order is therefore approve, sign, submit. An auditor's report dated before the Board meeting that approved the statements contradicts that order.

"Wherever they are appointed" works as a filter. The CEO, CFO and company secretary sign where those offices exist in the company. The sub-section does not itself create a duty to appoint them; whether a company must have such officers is a separate question under other provisions.

The auditor's report attaches to every financial statement

Section 134(2) is a single sentence: "The auditors' report shall be attached to every financial statement." It has no carve-out.

What the Board's report must include

Section 134(3) opens: "There shall be attached to statements laid before a company in general meeting, a report by its Board of Directors, which shall include" the following.

(a) Annual return web address. "The web address, if any, where annual return referred to in sub-section (3) of section 92 has been placed." This clause was substituted by Act 1 of 2018 with effect from 31 July 2018.
(b) Board meetings. The number of meetings of the Board.
(c) Directors' Responsibility Statement. Its content is set out in s.134(5), covered below.
(ca) Frauds reported by auditors. Details of frauds reported by auditors under s.143(12) "other than those which are reportable to the Central Government". Frauds that are reportable to the Central Government fall outside this clause; the rest are disclosed.
(d) Independent directors. A statement on the declaration given by independent directors under s.149(6).
(e) Nomination and remuneration policy. "In case of a company covered under sub-section (1) of section 178", the company's policy on directors' appointment and remuneration, including criteria for determining qualifications, positive attributes, independence of a director and the other matters in s.178(3).
(f) Board comments on qualifications. Explanations or comments by the Board on every qualification, reservation or adverse remark or disclaimer made by the auditor in his report and by the company secretary in practice in his secretarial audit report.
(g) Loans, guarantees and investments. Particulars of loans, guarantees or investments under s.186.
(h) Related-party contracts. Particulars of contracts or arrangements with related parties referred to in s.188(1), "in the prescribed form".
(i) State of affairs. The state of the company's affairs.
(j) Reserves. "The amounts, if any, which it proposes to carry to any reserves."
(k) Dividend. "The amount, if any, which it recommends should be paid by way of dividend."
(l) Post-year-end changes. Material changes and commitments, if any, affecting the financial position of the company which have occurred between the end of the financial year to which the statements relate and the date of the report.
(m) Energy, technology and foreign exchange. The conservation of energy, technology absorption, and foreign exchange earnings and outgo, "in such manner as may be prescribed".
(n) Risk management. A statement indicating development and implementation of a risk management policy, including identification of elements of risk which, in the Board's opinion, may threaten the existence of the company.
(o) CSR policy. Details about the policy developed and implemented on corporate social responsibility initiatives taken during the year. Section 135(2) separately requires the Board's report to disclose the composition of the CSR Committee, where a company is required to constitute one.
(p) Board evaluation. In the case of a listed company and every other public company having such paid-up share capital as may be prescribed, a statement on the manner in which the formal annual evaluation of the performance of the Board, its Committees and individual directors has been made.
(q) Other matters. Such other matters as may be prescribed.

Where a clause has an "if any" or "in case of" limit, it asks first whether the underlying fact exists at that company in that year. A Board that proposes no transfer to reserves, or recommends no dividend, records that. A company outside s.178(1) does not owe a clause (e) policy; one that is not a listed or prescribed public company does not owe clause (p). Two companies with the same year-end can therefore have legitimately different reports.

Two provisos that shorten the report

Section 134(3) carries two provisos, inserted by Act 1 of 2018 with effect from 31 July 2018:

Where disclosures required by the sub-section have been included in the financial statements, "such disclosures shall be referred to instead of being repeated in the Board's report".
Where the policy under clause (e) or clause (o) is made available on the company's website, if any, it is sufficient if the salient features of the policy and any change in it are specified in brief in the Board's report and the web address at which the complete policy is available is indicated.

Abridged report

Section 134(3A) lets the Central Government prescribe an abridged Board's report for a One Person Company or small company. This article does not state the content of any such abridged report.

The Directors' Responsibility Statement

Section 134(5) says the statement under clause (c) shall state that:

in preparing the annual accounts, the applicable accounting standards were followed, with proper explanation of material departures;
the directors selected accounting policies and applied them consistently, and made judgments and estimates that are reasonable and prudent, so as to give a true and fair view of the state of affairs at year-end and of the profit and loss for the period;
the directors took proper and sufficient care to maintain adequate accounting records in accordance with the Act, for safeguarding assets and for preventing and detecting fraud and other irregularities;
the directors prepared the annual accounts on a going concern basis;
in the case of a listed company, the directors laid down internal financial controls and those controls are adequate and operating effectively; and
the directors devised proper systems to ensure compliance with the provisions of all applicable laws, and those systems were adequate and operating effectively.

The internal-financial-controls limb, in s.134(5)(e), applies only "in the case of a listed company".

One Person Company

For a One Person Company, the Board's report means "a report containing explanations or comments by the Board on every qualification, reservation or adverse remark or disclaimer made by the auditor in his report" (s.134(4)). The financial statement itself is signed by one director (s.134(1)).

Who signs the Board's report, and what travels with the accounts

The Board's report and any annexures to it "shall be signed by its chairperson of the company if he is authorised by the Board". Where the chairperson is not so authorised, it is signed "by at least two directors, one of whom shall be a managing director, or by the director where there is one director" (s.134(6)).

Section 134(7) requires a signed copy of every financial statement, including consolidated financial statement, if any, to be issued, circulated or published along with a copy each of (a) any notes annexed to or forming part of the statement, (b) the auditor's report and (c) the Board's report under s.134(3).

Penalty

Section 134(8) says: "If a company is in default in complying with the provisions of this section, the company shall be liable to a penalty of three lakh rupees and every officer of the company who is in default shall be liable to a penalty of fifty thousand rupees." That is ₹3,00,000 on the company and ₹50,000 on each officer in default. The same figures apply to a default under any part of s.134, from the signing panel to a missing clause in the report.

Common mistakes

Signing before approval. Minutes that show signing ahead of Board approval, or an auditor's report dated before the approving meeting, break the s.134(1) sequence.
Wrong signing panel. Two directors where neither is the managing director although one is in office, or a missing signature of an appointed CEO, CFO or company secretary.
Half-answering clause (f). The clause names both the auditor's report and the secretarial audit report. Replying to one and ignoring the other does not satisfy it.
Stopping at clause (l). The list runs to (q). Energy and foreign exchange, risk management, CSR policy and, where applicable, Board evaluation belong in the report.
Recycling last year's text. Clauses (i) to (l) must describe this company's year.
Different signatories for the two documents. The signing rule for the financial statement (s.134(1)) is not the same as the rule for the Board's report (s.134(6)).

Filing-season checklist

Approval. Has the Board approved the financial statements, with the approval minuted, before anyone signs?
Signing. Does the panel match s.134(1), and does the Board's report signature match s.134(6)?
Attachment. Is the auditor's report attached to every financial statement, and does the Board's report cover each clause of s.134(3) that applies, using the two provisos where the disclosure sits elsewhere?
Circulation set. Does the signed set carry the notes, the auditor's report and the Board's report (s.134(7))?

What to do now

Next step: have the Board approve the financial statements, sign them under s.134(1), send them to the auditor, then finalise the Board's report with a reply to every qualification under s.134(3)(f) and sign it under s.134(6).
Deadline: the Act text on s.134 sets no calendar date. The statements must be approved and signed before they go to the auditor (s.134(1)), and the Board's report must be attached to statements laid before the company in general meeting (s.134(3)).
Consequence of default: a penalty of ₹3,00,000 on the company and ₹50,000 on every officer in default (s.134(8)).

Have a CA review your facts before you act or file.

FAQ

Who signs the financial statements before they go to the auditor?
The chairperson where authorised by the Board, or two directors (one the managing director, if any), together with the CEO, CFO and company secretary wherever appointed. In a One Person Company, one director signs. All of this follows Board approval (s.134(1)).

Does the auditor's report attach to every financial statement?
Yes. "The auditors' report shall be attached to every financial statement" (s.134(2)).

Who signs the Board's report?
The chairperson if authorised by the Board; otherwise at least two directors, one of whom is a managing director, or the director where there is only one (s.134(6)).

Where are auditor qualifications answered?
In the Board's report. Clause (f) requires explanations or comments on every qualification, reservation, adverse remark or disclaimer by the auditor and by the company secretary in practice in the secretarial audit report (s.134(3)(f)).

What is the penalty for default?
₹3,00,000 on the company and ₹50,000 on every officer in default (s.134(8)).

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