Directors' Responsibility Statement (Section 134)
The Directors' Responsibility Statement section 134 requires is the paragraph in an annual report where the Board puts its name to the accounting. Section 134(3)(c) of the Companies Act, 2013 makes the statement a compulsory part of the Board's report, and section 134(5) sets out, clause by clause, what it has to say. It is short, it is formulaic, and it is one of the few places in a filing where directors personally assert something about the numbers.
Definition
The Directors' Responsibility Statement
is a statement the Board must include in its report under section 134(3)(c) of the Companies Act, 2013. Section 134(5) fixes its content: that accounting standards were followed, that policies and estimates were prudent, that records were adequate, that the accounts are on a going concern basis, and that compliance systems were adequate. Source: Companies Act, 2013, section 134(5).
What must the Directors' Responsibility Statement under section 134 say?
Section 134(5) lists six clauses. Five bind every company that has to give the statement. Clause (e) binds listed companies only.
| Clause | What the directors must state |
|---|---|
| (a) | In preparing the annual accounts, the applicable accounting standards had been followed, with proper explanation relating to material departures |
| (b) | They selected accounting policies, applied them consistently, and made judgments and estimates that are reasonable and prudent, so as to give a true and fair view |
| (c) | They took proper and sufficient care for the maintenance of adequate accounting records for safeguarding the assets and for preventing and detecting fraud and other irregularities |
| (d) | They prepared the annual accounts on a going concern basis |
| (e) | In the case of a listed company, they laid down internal financial controls that are adequate and were operating effectively |
| (f) | They devised proper systems to ensure compliance with all applicable laws, and those systems were adequate and operating effectively |
Clause (b) is the one that connects back to section 129. The prudence assertion is made "so as to give a true and fair view of the state of affairs of the company at the end of the financial year and of the profit and loss of the company for that period", which is the section 129(1) standard restated as a personal claim by the directors.
The Explanation to clause (e) defines internal financial controls as the policies and procedures adopted by the company for ensuring the orderly and efficient conduct of its business, including adherence to company policies, the safeguarding of its assets, the prevention and detection of frauds and errors, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial information. That definition is why clause (e) is a far wider assertion than the other five, and it is the only one of the six that section 134(5) confines to listed companies.
Where the statement sits inside the Board's report
Section 134(3) lists what the Board's report attached to the statements laid in general meeting must include, in clauses running from (a) to (q). The Directors' Responsibility Statement is clause (c) of that list. A selection of its neighbours, chosen because they are what a reader gets alongside it, not because the others are absent from the Act:
- (a) the web address, if any, where the annual return under section 92(3) has been placed
- (b) the number of meetings of the Board
- (ca) details of frauds reported by auditors under section 143(12) other than those reportable to the Central Government
- (d) a statement on the declaration given by independent directors under section 149(6)
- (f) explanations or comments by the Board on every qualification, reservation, adverse remark or disclaimer made by the auditor and by the company secretary in practice in the secretarial audit report
- (g) particulars of loans, guarantees or investments under section 186
- (h) particulars of contracts or arrangements with related parties referred to in section 188(1)
- (k) the amount, if any, recommended to be paid by way of dividend
- (l) material changes and commitments affecting the financial position between the end of the financial year and the date of the report
Clause (ca) was inserted by the Companies (Amendment) Act, 2015, being Act 21 of 2015, section 12, with effect from 29 May 2015. It is the route by which an auditor's non-reportable fraud finding reaches the Board's report rather than stopping at the Central Government.
The two provisos to section 134(3), both inserted by Act 1 of 2018, section 36, with effect from 31 July 2018, cut repetition. Where a disclosure required by the sub-section already sits in the financial statements, the report may refer to it instead of repeating it. Where the policy under clause (e) or clause (o) is on the company's website, stating the salient features and the web address is sufficient compliance.
Who signs, and what is issued with the statement
Section 134(1) governs signature of the financial statement itself. It must be approved by the Board before being signed on behalf of the Board by the chairperson where authorised, or by two directors of whom one shall be the managing director if any, and by the Chief Executive Officer, the Chief Financial Officer and the company secretary wherever they are appointed. A One Person Company signs by one director only. Sub-section (1) in this form was substituted by Act 1 of 2018, section 36, with effect from 31 July 2018.
Section 134(6) governs the Board's report and its annexures: signed by the chairperson if authorised, otherwise by at least two directors of whom one shall be the managing director, or by the director where there is only one.
Section 134(7) then bundles the package. A signed copy of every financial statement, including the consolidated statement if any, must be issued, circulated or published along with the notes, the auditor's report, and the Board's report under sub-section (3). A reader who has the financial statement but not the Board's report is looking at an incomplete issue.
₹3,00,000
The penalty on the company under section 134(8) where it is in default in complying with section 134, as substituted with effect from 21 December 2020
Source: Companies Act, 2013, section 134(8), as substituted by Act 29 of 2020, s. 26
Every officer of the company who is in default is liable to a penalty of fifty thousand rupees. Both figures are penalties rather than fines: sub-section (8) was substituted by the Companies (Amendment) Act, 2020, being Act 29 of 2020, section 26, with effect from 21 December 2020, which is the amendment that moved the default out of the criminal column.
Why the statement is worth reading rather than skipping
It is formulaic, so the useful reading is comparative. Clause (a) asks for "proper explanation relating to material departures" from the accounting standards, which is the same territory section 129(5) covers when it requires the deviation, its reasons and its financial effects to be disclosed in the statements. Clause (f) of sub-section (5) asserts that compliance systems were adequate and operating effectively. The same report has to carry, under clause (f) of sub-section (3), the Board's comments on every qualification, reservation, adverse remark or disclaimer made by the auditor. A year in which those two sit side by side is a year worth reading closely.
- Section 129 financial statements is the true and fair view standard the responsibility statement asserts was met.
- Auditor fraud reporting under section 143 is where clause (ca) of section 134(3) gets its content.
- What is a corporate governance report is the listed company's parallel governance disclosure under the SEBI listing framework.
- What is a secretarial audit report is the report whose adverse remarks the Board must comment on under section 134(3)(f).
- What is a Form AOC-4 is the filing that carries the signed statement and the Board's report to the Registrar.
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Frequently asked questions
What is the Directors' Responsibility Statement?
A statement the Board of Directors must include in its report under section 134(3)(c) of the Companies Act, 2013. Section 134(5) fixes what it has to say about the accounting standards followed, the policies and estimates used, the accounting records maintained, the going concern basis, and the compliance systems in place. Source: Companies Act, 2013, sections 134(3)(c) and 134(5).
What must the Directors' Responsibility Statement contain?
Six clauses under section 134(5): that applicable accounting standards were followed with explanation of material departures, that policies were consistent and estimates prudent, that adequate accounting records were maintained, that the accounts are on a going concern basis, that a listed company laid down adequate internal financial controls, and that compliance systems were adequate and effective. Source: Companies Act, 2013, section 134(5).
Does the Directors' Responsibility Statement apply to unlisted companies?
Yes, but one clause less. Clause (e) of section 134(5), the assertion about internal financial controls being laid down, adequate and operating effectively, is expressed to apply in the case of a listed company. The other five clauses carry no such limitation. Source: Companies Act, 2013, section 134(5)(e).
What is the penalty for a default under section 134?
A penalty rather than a fine. Where a company is in default in complying with section 134, the company is liable to a penalty of three lakh rupees and every officer of the company who is in default is liable to a penalty of fifty thousand rupees. Source: Companies Act, 2013, section 134(8), as substituted by Act 29 of 2020, s. 26, with effect from 21 December 2020.
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