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True and Fair View of Financial Statements: Who will finally bell the cat?

One of the most important communications by a company to its shareholders is its financial statements. It is a key document on which shareholders rely while making their decision on whether to stay invested in a company or not, as it highlights the financial health of the company. The regulators also understand the importance of financial statements, due to which the issuance of the same is heavily regulated and scrutinized. Section 129 of the Companies Act, 2013 (“CA 2013”), provides that the financial statements shall give a ‘true and fair view’ of the state of affairs of a company, while also complying with the accounting standards notified under Section 133 and be in the form as provided in Schedule III of CA 2013.

Various stakeholders are involved in the preparation of these financial statements, including: i) the company management – they prepare the financial statements, using the applicable accounting standards; ii) statutory auditors – they audit the statements and issue a report as mandated under Section 143(2) of CA 2013, stating that to the best of their knowledge and information, the financial statements give a ‘true and fair view’ of the state of affairs of the company at the financial year end; iii) audit committee – they too confirm that the finalized financial statements are drawn in accordance with the applicable accounting standards and reflect a ‘true and fair view’ of the financials of the company; and iv) the Board of Directors – the audit committee shares its recommendations with the Board, on which the Board largely while approving the financial statements. Along with this, Section 134(5) also requires the Board of Directors to sign off the Directors’ Responsibility Statement, confirming that:

  • all accounting standards were followed,
  • a ‘true and fair view’ of the state of affairs of the company is reflected,
  • sufficient care was taken in safeguarding the assets of the company and for preventing and detecting fraud and other irregularities,
  • the accounts were prepared on a going concern basis, and
  • the internal financial controls (for listed companies only) and proper systems were devised and followed and that such controls and systems were adequate and operating effectively.

For listed companies, the chief executive officer and chief financial officer, pursuant to Regulation 17(8), read with Part B of Schedule II of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“SEBI LODR”), also have to furnish a compliance certificate, assuring that:

  1. They have reviewed the financial statements and the cash flow statement, and to the best of their knowledge and belief, there is no materially untrue statement, and the statements are in compliance with the accounting standards, and also reflect a ‘true and fair view’, and;
  2. No transactions entered into are fraudulent, illegal or violative of the code of conduct of the company;
  3. They accept responsibility for maintaining and establishing internal controls for financial reporting; and
  4. They have indicated to the audit committee and auditors about significant changes in internal controls and financial policies during the year and instances of significant fraud involving the management of the company.

A common confirmation required by all stakeholders is that the financial statements reflect a ‘true and fair view’ of the state of affairs of the company. In this blog, we analyze who is truly responsible for providing a ‘true and fair view’, and how the regulators, primarily the Securities and Exchange Board of India (“SEBI”), is reacting to breach of any of the above provisions.

‘True and Fair View’: Beginning of the blame game?

The CA 2013 or the SEBI LODR do not define what ‘true and fair view’ is, or what must either the CEO, CFO or Audit Committee keep in mind while certifying that the financial statements reflect a ‘true and fair view’. However, the Supreme Court in J.K. Industries Limited v. Union of India[1] held that to certify that the financial statements reflect a ‘true and fair view’, two factors must be satisfied: one, the financial statements are made out correctly, and two, the financial statements are shown as they are – they do not convey a misleading impression. Since each stakeholder is mandated to provide confirmation on whether the financial statements present a ‘true and fair view’; it begs the question that in case it does not, who should bear the brunt of it, and whether the onus may be shifted from one stakeholder to another?

As mentioned above, the order of financial statements’ preparation begins with the management, headed by the CFO → statutory auditor → audit committee → Board of Directors. It is key to note that when the CFO prepares the financial statements and sends it to the statutory auditor, he/ she also shares a ‘Management Representation Letter’, containing a detailed representation on the financials, basis which the auditor issues its certification. If broken down at a stakeholder level, in case of any SEBI-initiated action, the Board of Directors may point fingers at the CEO/CFO or the audit committee for failure to carry out their responsibilities diligently. In turn, the audit committee may point fingers at the statutory auditors, who may point fingers at the CEO/CFO of the company for failure to provide a ‘true and fair view’. To understand the liability, an analysis of the provisions is imperative.

Relevant Framework and Precedents

Section 129(7) of CA 2013 provides for the liability for failure to comply with any provision in Section 129. It states that in case of contravention, the managing director, the whole-time director in charge of finance, and the CFO or any other person charged by the Board with the duty of compliance under Section 129 shall be held liable. However, in the absence of these persons, all the directors can be held liable. Section 149(12) of CA 2013 creates a carve-out, which limits the liability of an independent director, or the non-executive director, who is not a promoter or key managerial personnel “only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently.

Like CA 2013, Regulation 25(5) of the SEBI LODR also limits the liability of independent directors “only in respect of such acts of omission or commission by the listed entity which had occurred with his/her knowledge, attributable through processes of board of directors, and with his/her consent or connivance or where he/she had not acted diligently with respect to the provisions contained in these regulations.” Irrespective, SEBI imposes penalties on independent directors, CFOs, CEOs and executive directors under Section 15HB of the SEBI Act, which allows SEBI to penalize any person or entity for failure to adhere to any rules, regulations, directions for which no specific penalty is provided. SEBI also relies on Section 27 of the SEBI Act providing for vicarious liability to implicate directors and key managerial personnel, for failing to provide a ‘true and fair view’ in the financial statements.

For instance, in the matter of LCC Infotech Limited,[2] the CEO and CFO were held liable under Regulation 17(8) of SEBI LODR for furnishing a false compliance certificate to the Board, confirming that the financial statements reflect a ‘true and fair view’. The independent directors, part of the Audit Committee, were also held liable for failure to exercise due diligence in approving the financial statements that resulted in the publication of misrepresented/ misstated financial statements of the company and a penalty of INR 1,00,000 under Section 15HB of the SEBI Act was imposed on each of them.

In the matter of Bombay Dyeing and Manufacturing Company Limited[3], a penalty of INR 10,00,000 each, under Section 15HB of the SEBI Act, was imposed on each of the independent directors, forming a part of the Audit Committee, for failure to exercise due diligence to ensure that the financial statement is correct, sufficient, and credible. The erstwhile CFOs were also held liable for providing a false certification under Regulation 17(8) of the SEBI LODR as the financial statements did not provide a ‘true and fair view’. SEBI went a step further while considering whether non-compliance with ‘true and fair view’ and accounting standards would amount to fraudulent and unfair trade practice under the SEBI (Prohibition of Fraud and Unfair Trade Practice) Regulations, 2003 (“FUTP Regulations”), and held that such manipulation of financial statements is violative of FUTP Regulations. While this order was stayed by the Securities Appellate Tribunal, it does not rule out the use of FUTP  Regulation in holding companies liable for non-compliance with ‘true and fair view’ and/ or accounting standards. It is also interesting to note that the penalty threshold for FUTP Regulations under Section 15HA is way higher than under Section 15HB, hence imposing increased responsibilities on a company.

A conjoint reading of the aforementioned provisions, and the relevant case laws indicate that SEBI is not sparing any stakeholder, whether the CEO/ CFO or the Audit Committee, in case of any financial misstatement or when financial statements do not reflect the ‘true and fair view’. As far as the statutory auditor is concerned, while SEBI has no jurisdiction for acting against them, it refers the matter to the National Financial Reporting Authority (“NFRA”), which then takes stringent actions, including imposition of steep penalties and debarment from practice.

Concluding Thoughts

The establishment of the NFRA under Section 132 of CA 2013 has altered the rules of the game for the accounting and auditing profession. The NFRA has adopted a ‘zero tolerance’ approach towards auditors, for failure to maintain the prescribed quality standards or if there are deficiencies in the audit or if the accounts fail to reflect the ‘true and fair view.’ Likewise, SEBI has also adopted a zero-tolerance approach to any misleading statements or financial statements not reflecting ‘true and fair view’ or not complying with the accounting standards. The NFRA has also recently done a historic overhaul of the auditing standards, making auditors far more accountable for financial statements of subsidiaries. CEOs and CFOs have also realized that mechanically signing the certification for ‘true and fair view’ is going to land them in trouble, if it is not backed up by the robust process that ensures that the financial statements reflect a ‘true and fair view’ of the state of affairs of the company.

The gatekeepers of governance are increasing by the day and all of them are keeping an ‘Arjuna Eye’ on the authenticity of financial statements. The time has come for the audit committee to devote much greater time and attention to the integrity of financial statements before recommending them to the Board for adoption. Passing the buck may not work going forward, as audit committee members have also been made liable by SEBI. Overall, India Inc. is headed towards a much more robust process for approval and adoption of financial statements.

The reader may also read an earlier article titled “How True is True and Fair View?”, where the authors highlight an ‘inconvenient truth’ on certification of ‘true and fair view’ of financial statements.


[1] J.K. Industries v. Union of India, (2007) 13 SCC 673.

[2] Adjudication Order in the matter of LCC Infotech Limited, November 12, 2024, Order/AS/RM/2024-25/30962-30968.

[3] SEBI WTM Order in the matter of The Bombay Dyeing and Manufacturing Company Ltd, October 21, 2022, WTM/AB/CFID/CFID_1/20686/2022-23.

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Photo of Bharat Vasani Bharat Vasani

Senior Advisor – Corporate laws at the Mumbai office of Cyril Amarchand Mangaldas. Bharat has over 30 years of experience at senior management level. His areas of specialization includes company law, corporate and commercial laws, securities law, capital market, mergers and acquisitions, joint…

Senior Advisor – Corporate laws at the Mumbai office of Cyril Amarchand Mangaldas. Bharat has over 30 years of experience at senior management level. His areas of specialization includes company law, corporate and commercial laws, securities law, capital market, mergers and acquisitions, joint ventures, media & entertainment law, competition law, employment law and property matters. He heads firm’s media and entertainment law practice.  He is highly regarded in Government circles and in various industry organizations for his proactive approach on public policy issues. Bharat was a member of the Expert Committee appointed by the Government of India to revise the Companies Act, 2013.

Prior to joining the Firm, Bharat was the Group General Counsel of the Tata Group.  He has been at the helm of and steered several large key M&A transactions pursued by the Tata Group in the last 17 years.

Bharat’s contribution to the legal fraternity has been recognized by the Harvard Law School’s Award for Professional Excellence in 2016. Bharat has won several other national and international awards for his various achievements. He had a brilliant academic record in law and first rank holder in all India company secretary examination. He can be reached at bharat.vasani@cyrilshroff.com

Photo of Ayush Lahoti Ayush Lahoti

Associate in the General Corporate Practice at the Mumbai Office of Cyril Amarchand Mangaldas. Ayush can be reached at ayush.lahoti@cyrilshroff.com.