KERALA COOPERATIVE AUDIT MANUEL VOLUM I PART IV CHAPTER III

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PART IV

CHAPTER III

ASSESSMENT AND LEVY OF AUDIT FEES

1. Procedure for levy of audit fees - Statutory provision :- Audit of Co-operative Societies is the statutory responsibility vested on the Registrar. In order to carry out this responsibility effectively, the Registrar has to maintain sufficient number of staff, indifferent categories, the cost of which is met from out of Public revenue.

Every Co-operative Society whose accounts are audited by the Department, is required to pay to the Government audit fees according to the scale fixed under the provisions of the Co-operative Societies Act and Rules. The audit fees payable by a Society is calculated soon after the audit is over, and the amount payable is to be specified in the audit certificate. The basis of levy of audit fee  is different for different types of societies.

Rule 65 of the Kerala Co-operative Societies Rules 1969 governs the payment of audit fees for the different types of societies, which are as follows:

(1) Every Co-operative Society shall pay to Government within one month of receipt of the annual audit certificate an audit fee calculated on the working capital as on the last day of the co-operative year to which the audit relates or on the total sales during the year or on the gross income during the year, as the case may be, as shown below.

(i) Credit Societies (excepting primary Land Mortgage Banks Housing Societies and House Mortgage (Banks) on the working capital.

(ii) Primary Land Mortgage Banks, House Mortgage Banks, Housing Societies :- on the aggregate of loans issued and that recovered during the year under audit.

(iii) Societies having credit and non credit activities :- On working capital or on sale proceeds of goods whichever is higher.

(iv) Societies dealing in goods (excepting Coir Societies) :- On sale proceeds.

(v) Coir Co-operative Societies :- On proceeds of Coir sold as owner as well as on the commission realised on goods sold as agents.

(vi) Transport Societies :- On hire charges collected and sale proceeds of articles.

(vii) Other Societies :- On gross income.

Audit fees will be calculated at the rate of 30 Paise for every one hundred Rupees or part thereof on the working capital, the value of sales or gross income, as the case may be up to Rs. 5 lakhs and thereafter at the rate of 20 Paise for every next one hundred rupees or part thereof. The maximum audit fees payable by a Society should not exceed Rs. 3000

2. Exemption from payment of audit fees :- The following classes of Societies are exempted from the payment of audit fees.

(a) All Co-operative Societies of which all or a majority of the members are Harijans.

(b) All farming societies

(c) All social welfare societies.

(d) Any society or group of societies which has its accounts audited at its own expense by an officer of the Co-operative Department, as per provisions contained in Sub rule (2) of Rule 65 of the Kerala Co-operative Societies Rules or under an agreement approved by the Registrar to audit the accounts of such Society.

(e) Any weavers’ Society or coir co-operative Society, or housing society or primary society formed for the benefit of Fishermen until it has completed the sixth co-operative year after commencing business.

(f) Any Society for the first year of audit, irrespective of the date of commencement of business.

(g) Any credit society the working capital of which does not exceed Rs. 2,000 and any other society the sales or gross income of which does not exceed Rs. 10,000.

Audit fees payable by a Society is to be remitted into the Government Treasuries under the proper head and the receipted chalan issued by the Treasury Officer, should be sent to the Assistant Registrar (General) Deputy Registrar, concerned, who will watch the proper collection of audit fees.

KERALA COOPERATIVE AUDIT MANUEL VOLUME I PART IV CHAPTER IV

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PART IV

CHAPTER IV

1. Offences under the Kerala Co-operative Societies Act :- Section 94 of the Kerala Co-operative Societies Act, 1969 deals with offences :

(i) No person other than a society shall carry on any business or trade under any name or title of which the word ‘Co-operative is party, with out Government sanction.

(ii) Section 35 of the Act confers on the Co-operative Societies certain privileges. One of the privileges is the conferring of first charge on certain special assets of the members. Therefore if any member disposes of property in respect of which the Society has got a first charge it is an offence under the Act.

(iii) Willfully making false returns, furnishing of false information failure to produce cash balance on demand, failure in make available the records for audit inquiry, inspection etc, willfully or without any reasonable excuse disobeying any summons, requisition or lawful written order, issued under the K.C.S. Act, etc., are offences under the Act.

(iv) Section 37 of the Act empowers the pay disbursing officers to recover from the salary of the employee, the dues of the society, in which he is a member, subject to his executing an agreement authorising the employer to deduct the dues. After the execution of such an agreement by the member if such employer fails to deduct any amount as required, or fails to pay to the Society the amount so recovered within seven days from the date on which such deduction was made, have been made offences under the Act.

(v) Failure of any person to deposit the money collected for the formation of a society in the State Co-operative Bank, Central Co-operative Bank, or Post office savings account, or in any other approved Bank within 14 days of its collection, constitute an office. Misapplication of such share money is also an offence.

(vi) Misappropriation or unauthorised retention of money belonging to a society also constitute an offence. The offences under the Kerala Co-operative Societies Act are in addition to the offences under the Indian Penal Code or any other Act. The offence under the Indian Penal code is distinct from the offences under the Act.

2. Theft :- In order to constitute an offence, existence of certain essential factors have to be provided or established. Therefore to establish an offence of theft it, has to be proved that any movable property like cash, negotiable instruments or valuables contained in a safe or strong room of the Bank or Society have been removed or goods have been removed from its godown by any person intending to take it dishonestly.

3. Criminal misappropriation :- The offence commonly met within Co-operative society/Bank in the misappropriation of its funds. A person can be held liable for criminal misappropriation, only if he dishonestly misappropriates or converts for his own use, money, goods or other moveable property which has come into his possession. Dishonest intention to appropriate illegally is the basis for institution of criminal proceedings. Therefore, to sustain a charge of misappropriation the prosecution has to prove that the accused dishonestly misappropriated or retained for his use movable property. It is not required to prove the quantum of money misappropriated to prove the guilt. The dishonest intention to appropriate the property of another is common both in theft and misappropriation.

The fact that the accused was given time to remit the money misappropriated will not vitiate a conviction for criminal misappropriation, or shown that the matter is one to be dealt with  the civil court only.

4. Criminal breach of trust :- To constitute the offence of criminal breach of trust there must be dishonest misappropriation by a person in whom confidence is placed as to the custody or management of the funds or property, in respect of which the breach of trust is alleged. There must be an entrustment, there must be misappropriation to one’s own use, or use in violation of any legal contract and the misappropriation or conversion of money must be with a dishonest intention. The principal ingredient being entrustment of property, dishonest misappropriation or converting to own use. A failure for breach of any obligation to account for the property entrusted, will justifiably lead to an inference of dishonest misappropriation.

5. Fraudulent Deeds :- Section 421 to 424 and 206 to 210 of the I.P.C. deal with fraudulently dealing with one’s property to defeat creditors. On an analysis it is seen that sections 421 to 424 deal with the following topics:-

(a) Fraudulent concealment of property in one’s possession. (Sn. 421 and 424 of IPC).

(b) Fraudulently preventing debt being available for creditors (Sn. 422 of IPC)

(c) Fraudulent execution of a deed of transfer (Sn. 423 of IPC)

(d) Fraudulent release of a debt (Sn. 424 of IPC.)

All the above frauds are, as the above sections indicate, committed without reference to any proceedings in court by means of transactions between individuals acting in collusion with each other.

6. Duty of Auditor to help Police :- Whereas a case of misappropriation of funds of a society is reported to the Police for investigation, it is the duty of the Auditor to render possible assistance in making out a case. As Co-operative accounts are of a technical nature, the auditor will be able to help the Police to a very great extent.

Reported Cases

1. Bad debt or loss to the society :- In order to term a particular amount as bad debt or loss to the society, it must be shown that it is irrecoverable and all reasonable attempts were made to recover it. Circumstances such as limitations, insolvency of the party etc., will have to be considered (M.C.T. 1964-Sohanal Vs. Melghat Agricultural Sale Society).

2. Payment of dividend out of Capital :-

Leeds Estate Building and Investment Co. Vs. Shepherd

Where there were no profit and dividends to share holders and fees and bonuses of the directors and the Managers were paid out of capital, the directors and even the auditor, who had certified the inaccurate balance sheet were held liable.

3. In P.R. Pai Vs. Malwan Co-operative Bank it has been held that if the management or a board entrusted with management were to act flouting the express instruction lawfully issued, and on a result of such action loss has resulted, the action can by no means be regarded as prudent or bonafide.

4. The bye-laws of Co-operative Society are in a way a document of incorporation of the society from which it derives its powers. As the society derives its powers from the bye-laws, it cannot appoint the Managing Director in the absence of the provisions in the bye-laws with regard to such appointment.

The observation of the Tribunal is as follows:

“The payment of honorarium or advance referred to above is certainly in contravention of the bye-laws and hence the same is illegal and invalid and the Defendant is not at all entitled to the same. The receipt of such amount is in the nature of misapplication of the funds and the Defendant is liable to refund the same. (M.C.T. Laxman Vs. Amalnor Peoples Co-operative Credit Society).

KERALA COOPERATIVE AUDIT MANUEL VOLUME I PART IV CHAPTER II

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PART IV

CHAPTER II

AUDIT CLASSIFICATION

1. Introduction :- On completion of audit of a society, the auditor should classify it in accordance with the instructions issued by Registrar from time to time. Classification of a society is an important duty vested with the auditor and therefore it should be done most carefully and intelligently. The Auditor has to note that wrong classification into the low orders may weaken the enthusiasm of the office bearers to the society. At the same time he should not given any higher classification than that is actually eligible to the society.

The classification is hereby based on two distinct tests viz.,

(i) The financial stability, economic viability, soundness etc., and

(ii) The administrative efficiency, general performance etc. of the Society.

Registrar’s conference in 1976 laid down certain standards which were adopted by the States with modification to suit local conditions. The Rural credit Survey Committee also stressed that these should be uniform standards of audit classification on an All India basis in respect of different types of Co-operative since the “existing standards are so varying as to cause a great deal of confusion”. Accordingly the Agricultural Credit Department of Reserve Bank has, in conjunction with the standing Advisory Committee on Agricultural Credit, evolved certain standards, to be followed by the States in classifying the Societies in audit.

2. Broad principles of classification :- The following general standards have been laid down for classifying agricultural credit societies and Rural Banks:-

(1) Capital structure :- The progress made in strengthening the capital structure,  own funds etc. and in tapping more deposits when compared with the previous years.

(2) Credit and Financial stability, economic viability etc.

(3) Management efficiency, maintenance of accounts etc.

(4) Undertaking of subsidiary activities.

(5) General working.

(a) Credit Societies

Particulars	Maximum Marks Allotted	Marks awarded by auditor
1. Capital Structure (20) The sum total of share capital and deposits at the end of the year should be compared with the loans outstanding against members at the end of the year. If the proportion is 10% and less no marks will be awarded. One mark will be awarded for each 10% of increase over 10.	20
2. Credit (Loans to members) (30) (a) Work out of the percentage of the total volume of loans issued during the year to the total amount of loans required by members as part normal credit limit. Statements or proportion of the avearage loan issued per member to individual credit limit. Award one mark for each 5%.	6
(b) There should be a timelag of at least a fortnight between the date of repayment of a loan by a member and the issue of the fresh loan. Marks will have to be awarded on the basis of the usual time lag noticed. (10 marks)	4
(c) Percentage of overdues to demand under principal for the year. (If the percentage of overdues to demand is 30, no marks. If it is less than 30, one mark for each 3% reduction. If the percentage is more than 30, minus one mark for each 6% increase up to a maximum of 5 marks).	10
(d) Percentage of overdues to demand under interest. (If the percentage of overdues to demand is 20, no marks. If it is less than 20, one mark for each 4% decrease. If the percentage is more than 20, minus 1 mark for each 8% increase upto a maximum of 5 marks).	5
(e) Percentage of number of defaulters to total number of borrowers. (If the percentage of defaulters to total number of borrowers is 20 or more, no marks. If the percentage is less than 20, one mark for each 4% reduction).	5
(f) Financial stability cover for bad and doubtful debts. The total of the reserve fund and bad debts reserve should completely cover 100% of the Bad debts plus 50% of the doubtful debts. Work out the percentage of the former to the latter and award marks at the rate of 1 mark for each 6%.	10
3. Management (15) (a) Rectification of defects pointed out in audit and inspection progress.	4
(b) Effective action against defaulting members (including legal steps).	3
(c) Holding of meetings-once a month at least to discuss ways and means to develop the busines of the Society.	4
(d) Maintenance of accounts (ledgers should be properly posted upto date and correct monthly and quarterly statements of receipts and payments should be prepared promptly and placed before the Board either by the Secretary or by full-time or part-time clerks).	4
4. General working of the Society including supply, marketing and processing functions trained office bearers or employees, committee members and educational activities. Marks to be awarded in the assessment made by the auditor.	25
Total	100
Classification proposed for the year.

In the case of other Societies except those noted above and except District/Central Co-operative Banks, the classification is done on the following basis.

Class A :- The Society which requires no help from official and non-official staff for its working (excepting annual audit) comes under ‘A’ Class. An ‘A’ class Society does not want any supervision from the Union or Central Banks. Overdues of loans with members should not be more than 10% of the total outstandings with members. The Society maintain its own paid and qualified staff. It must also be working at profit.

Class B :- The overdues in a ‘B’ Class Society should not be alone 25%. Its accounts may not be entirely faultless. The general co-operative vitality of the Society must be reasonably high. Its management should be one that taken keen interest in remedying its defects.

Class C :- A Society which does not fall under A, B and D classes is to be classified as ‘C’. Its overdues should not be above 40%. Its financial position should be ultimately sound.

Class D :- Societies the overdues of which exceed 40% and which are moribund are to be classified as ‘D’. No Society should be classified as ‘D’ so long as it is considered it to receive loans on any terms whatever from the financing institutions. If a Society remains in ‘D’ Class for 2 or three years continuously it will have to be liquidated.

The above are the standards generally adopted to classify credit Societies.

(b) Non-credit Societies

There are many types of non-credit societies, but separate standard for each type is not indicated here. But from the principles narrated above; the auditor can find out which type of measuring rod should be applied to a particular type of society. Among non-credit societies, audit classification of consumer and industrial societies are discussed here.

(i) Consumer Societies :- The main object of a consumer society is the distribution of consumer goods to its members. The auditor has to verify the loyalty of members to the society by verifying whether or not the members are purchasing all their requirements from the Society if the society is ready to meet their demands. Efficient and economic management of the Society, adequacy of working capital, proportion of owned capital to borrowed capital, supervision exercised by the Committee over the employees, gross income and net income, proportion of establishment and contingent charges to gross income, purchase policy, rotation of funds, service to the customers, maintenance of registers and records etc., are some of the factors to be considered by the auditor in deciding the audit classification. Dependence on owned funds and deposits, if any, from members, insistence on cash sales, system of internal check are still other important points to be borne in mind by the auditor in awarding the classification.

Consumer Societies must be subjected to the above tests and those societies which possess a very high standard and come out successfully in all the tests can be classified under ‘A’, if no serious defects are noticed in their working. Class B can be given to the societies who are when applied with the above tests keeping less standards, than that of A in making steady profits whose owned capital is not less than 50% of the working, capital, and where more than 40% of the members purchase their requirements from the society and where the overdues on credit sales to members do not exceed 20%. Societies which are incurring loss either due to bad management or lack of sufficient volume of business and where not less than 25% of the members are purchasing their requirements from the Society and where the overdues on credit sales do not exceed 40% can be classified as ‘C’. All other societies which do not fall on the above classes will be classified under ‘D’.

The auditor may remember that these are only indications and broad directions to arrive at the proper classifications.

(ii) Industrial Societies :- Over and above the general principles already enunciated the following points are also to be considered in awarding audit classification to Industrial Societies.

Industrial Societies are generally producers’ Societies. So there must be adequate arrangements to purchase economically the raw material required by the producers. The Society should be in a position to purchase and sell the finished products of its members, on agency basis. There must be a good system to check the quality  of finished gods. The Society must have adopted sufficient safeguards to effect compulsory savings for its producer members. Industrial Societies are given substantial financial assistance from Government, and therefore proper utilisation of such assistance has to be verified by the auditor. The books of accounts of the Society should be maintained correctly and promptly. The members of the staff must be trained and qualified. Loans, if any, advanced to the members should have been utilised properly. The overdues should not exceed 10% of the outstandings.

A Society fulfilling the above conditions and in which no serious defect are seen can be classified under ‘A’. A Society can be classified under ‘B’, where 50% of the members take part in the production activities of the Society and where the overdue do not exceed 20% of the outstanding.

A Society which is financially weak, where the overdues exceed 20% of outstandings, and where not more than 25% of the members are engaged in production activities, is to be classified under ‘C’.

All other societies come under ‘D’.

The auditor has to award suitable marks in the audit more in accordance with the above broad norms and to submit the name to the Deputy Registrar/Assistant Registrar along with the audit certificate. While checking the audit note and connected records the Deputy Registrar/Assistant Registrar has also to check the reason behind the marks awarded by the auditor before approving the audit certificate. The audit classification should be indicated in the audit certificate at the time of issue.

Audit Classification of non-credit Societies

Sl. No.		Maximum marks allotted	Marks awarded by auditor
1 2 3 4 5 6 7 8 9	Capital structure Enrolment of members Extent of business done Subsidiary activities Provision for bad and doubtful assets Maintenance of accounts Rectification of audit and inspection defects Holding of committee and General Body meetings. General working including working results, service to members, trained office bearers or employees, committee members Educational activities etc.	10 5 25 10 10 10 10 5 15 ------- 100 =====

(c) Co-operative Central Banks

The Reserve Bank of India, provides financial accommodation to the agricultural credit Societies, through the Kerala State Co-operative Bank, who route them through the District Co-operative Banks. Under Section 17 of the Reserve Bank of India Act, District/Central Co-operative Banks, to become eligible for the assistance should conforms to certain well defined standards. One of the norms fixed is that Central Co-operative Banks falling under A and B classes alone are eligible for Reserve Bank of India assistance on the security of two signatories. The following norms are adopted for the audit classification of the District/Central Co-operative Banks.

‘A’ Class Central Banks :

(1) The arrears under principal should not exceed 20% of demand and arrears under interest should not exceed 5% of the demand.

(2) The total of the entire bad debts and 50% of the doubtful debts should not exceed the Bad debts Reserve of the Bank.

(3) The short term liabilities of the Bank should not exceed the short term investments exclusive of overdues.

(4) The Bank should have maintained the required standard of fluid resources through the year in accordance with the rules in force in the State concerned.

(5) At least 50% of the loans issued during the year should be for short term purposes.

(6) Not more than 35% of the Societies indebted to the Bank should be defaulters.

(7) The Bank should have worked at profit.

(8) The management of the Bank should be efficient and the staff duly qualified.

‘B’ Class Central Banks :

These Banks must satisfy item Nos. 3, 4, 7 and 8 of the standards prescribed for ‘A’ Class Banks and must in addition satisfy the following standards.

(1) The arrears under principal may exceed 20% but should not exceed 40% of the demand. There may be interest overdues but it should not exceed 10% of the demand.

(2) The total of Bad and doubtful debts should not exceed the Bad debt Reserve and Reserve Fund of the Bank.

(3) Not less than 40% of the loans issued to Societies during the year should be for short term purposes.

(4) Not more than 50% of the Societies indebted to the Bank should be defaulters.

‘D’ Class Central Banks :

(1) The overdues under principal exceed 60% of the demand and under interest exceed 15% of the demand.

(2) The Bad and doubtful debts exceed the owned capital ie. the Reserve Fund, the Bad Debts Reserve and paid up share capital.

(3) The required standard of fluid resources is not maintained on several days during the year.

(4) The long term and medium term loans issued during the year exceed 75% of the loans issued to Societies.

(5) More than 60% of the Societies indebted are defaulters.

(6) The Bank has worked at loss.

(7) The management of the staff is not satisfactory.

‘C’ Class Central Banks :

The Banks which do not fall under A, B or D Class

[Revised standards for audit clarification of Central Banks are appended (Appendix II 5)]

3. Classification on the basis of marks obtained :

When audit classification has to be made based on the marks obtained, the auditor has to prepare a statement showing the marks allotted under each head and sub head, to determine in what audit class the Society has to be placed. Where a system of awarding marks has been prescribed, the auditor should use his discretion as to the extent of fulfillment of the various conditions/criteria and award marks. Based on the total marks obtained the societies may be classified as under:

1. Societies getting 60% and above and working on profit will be classified under ‘A’. Those getting more than 50% but less than 60% under ‘B’, those getting more than 35% but below 50% under ‘C’ and those getting less than 35% will be classified under ‘D’.

(a) No Society shall be classified as ‘A’ whose overdues to demand under principal exceed 20% (Here specify the percentage).

(b) No Society shall be classified as ‘B’ whose overdues to demand under principal exceed 25% (Specify the percentage).

(c) In the case of service societies, suitable marks for non credit activities should be allotted out of the marks assigned for general working. (Under item 4 above).

(d) New Societies will not be classified for the first 2 years and they will be shown as “unclassified”.

4. Submission of Special Reports :

The defects, if any, noticed by the auditor are to be listed in a classified and consolidated form on separate sheets, which will be called “Schedules of audit defects” or summary of defects. In case any  defect is of very serious nature and requires special attention of appropriate authorities, the auditor should submit a separate special (confidential) report in the matter immediately on detection of the defect.

The Special report should immediately be submitted to the Deputy Registrar of Co-operative Societies (Audit), concerned, or to the concerned superior officer in the following cases also.

(a) Misappropriation of funds or other properties of the Society (Including temporary misappropriation).

(b) Imprudent or irregular advances of loans and cash credits, benami loans, loan against inadequate or non-existing security or disproportionate loans to the members of the Committee, to their relatives, close associates etc.

(c) Non production of cash balance even after the service of summons, by the auditor, destruction of records, disappearance of a responsible officer of the Society etc.

(d) Expenditure which are objectionable and are disproportionate to the financial position or economic viability of the Society.

(e) Cases in which important provisions of the Act, Rules or byelaws of the Society have been infringed, such as failure to hold timely annual general meeting, non conducting of election, continuance of an invalid or disqualified Committee, failure to hold committee meetings regularly etc.

(f) Cases in which office bearers involved in the transactions and which have brought avoidable losses to the Society due to their negligence or due to their willful action to bring benefit to themselves by such deeds.

(g) Any other serious irregularity warranting immediate action.

While preparing special report the auditor has to bear in mind certain vital principles. Firstly, he should satisfy himself that circumstances exist which warrant the submission of a special report. Such special reports should therefore, be restricted to important maters on which some immediate administrative action is called for. Secondly, the auditor should have conducted through investigation into the mater and gathered sufficient materials for launching, both Civil and Criminal action against the delinquents after satisfying himself of the serious defect, Mere mention of susplinous circumstances without adequate proof will not be sufficient. In case the auditor is unable to carry out a complete inestigation by himself, he may the suggest for a statutory enquiry by the Administrative Department for a detailed investigation into the matter. But before he suggests for an enquiry attempts should be made to investigate the matter and collect all available evidences.