Legal Requirements for Appointing a Registered Valuer in Financial Audits

Financial audits involve examining a company's financial statements, accounting records, assets, liabilities, and compliance with applicable regulations. In certain situations, the auditor or company may require an independent valuation to support the reported value of assets, investments, shares, or other financial items.
In India, the appointment and responsibilities of a registered valuer are primarily governed by Section 247 of the Companies Act, 2013 and the Companies (Registered Valuers and Valuation) Rules, 2017.

However, a registered valuer is not required for every financial audit. The legal requirement generally arises when a valuation is specifically required under the Companies Act or the applicable rules.

Is a Registered Valuer Mandatory for Every Financial Audit?

No. Every company undergoing a statutory financial audit is not automatically required to appoint a registered valuer. The statutory auditor examines the company's financial statements and expresses an independent audit opinion. A registered valuer, on the other hand, provides an independent valuation of specified assets, liabilities, securities, or other interests.

For example, if a company owns land and buildings, the statutory auditor may examine the accounting treatment and supporting records. However, where a valuation by a registered valuer is specifically required under the Companies Act, the company must appoint an appropriately registered professional. This distinction is important because an audit and a valuation are separate professional functions, even though valuation reports may support financial reporting and audit procedures.

What Does Section 247 of the Companies Act, 2013 Require?

Section 247 of the Companies Act, 2013 establishes the legal framework for valuation by registered valuers. It provides that where valuation is required under the Act in respect of property, stocks, shares, debentures, securities, goodwill, other assets, a company's net worth, or its liabilities, the valuation must be conducted by a person who meets the prescribed qualifications and is registered as a valuer.

The appointment must be made by the company's Audit Committee or, where there is no Audit Committee, the Board of Directors.

Section 247 also requires the registered valuer to:

• Conduct an impartial, true and fair valuation.
• Exercise due diligence while performing the assignment.
• Follow the applicable valuation rules and standards.
• Avoid assignments involving prohibited direct or indirect interests or conflicts.

Therefore, the company must ensure that both the appointment process and the valuation assignment comply with the applicable legal requirements.

Who Can Appoint a Registered Valuer?

Under Section 247, the authority to appoint a registered valuer rests with the Audit Committee or, in its absence, the Board of Directors.

The appointment should clearly identify the purpose of valuation, the assets or liabilities being valued, the valuation date, and the expected deliverables.

For example, if a company requires the valuation of its shares for a transaction covered by the Companies Act, the Audit Committee may appoint an eligible registered valuer. If the company does not have an Audit Committee, the Board of Directors performs this function.

The statutory auditor does not automatically become the appointing authority merely because the valuation is required during an audit.

Eligibility Requirements for a Registered Valuer

The Companies (Registered Valuers and Valuation) Rules, 2017 prescribe the eligibility, qualifications, experience, and registration requirements for valuers. A professional appointed under Section 247 must hold valid registration with the Insolvency and Bankruptcy Board of India (IBBI) for the relevant asset class.

The principal asset classes include:

Land and Building: Valuation of land, residential properties, commercial properties, industrial buildings, and other real estate assets.

Plant and Machinery: Valuation of manufacturing equipment, industrial machinery, production facilities, and other physical assets.

Securities or Financial Assets: Valuation of shares, securities, financial instruments, and other financial interests.

The company should verify the valuer's registration and ensure that the professional has the appropriate asset-class expertise for the assignment. A registration in one asset class should not be treated as automatic authority to undertake valuations in another.

Independence and Conflict of Interest Requirements

Independence is an important legal requirement when appointing a registered valuer. Under Section 247, a valuer must not undertake the valuation of assets in which the valuer has a direct or indirect interest during the three years before appointment or the three years after the valuation.The valuer must also disclose any relevant interest or conflict in the valuation report.

For example, if a professional has a financial interest in a company whose shares are being valued, the appointment may create an independence issue. The company should therefore assess potential conflicts before finalising the appointment.

Maintaining independence helps ensure that the valuation reflects the relevant facts, assumptions, and market conditions rather than the interests of the company or any particular stakeholder.

What Should a Registered Valuation Report Include?

Rule 8 of the Companies (Registered Valuers and Valuation) Rules, 2017 sets out the requirements for conducting a valuation and preparing the report.

The report should provide sufficient information to explain the valuation process and support the final conclusion.

It generally includes:

• Background information about the asset being valued.
• Purpose of valuation and appointing authority.
• Identity of the valuer and any experts involved.
• Disclosure of interests or conflicts, where applicable.
• Appointment date, valuation date, and report date.
• Inspections and investigations undertaken.
• Sources of information used.
• Valuation procedures and standards followed.
• Key factors considered and the final valuation conclusion.
• Relevant assumptions, limitations, and disclaimers.

The report should be clear enough for the company and other authorised users, including auditors where relevant, to understand the basis of the valuation.

Role of a Registered Valuer During Financial Audits

A registered valuer can provide independent valuation evidence that may assist the statutory auditor in examining certain financial statement items.

For example, consider a company reporting specialised machinery with a carrying value of ₹5 crore. If an applicable accounting or legal requirement calls for an independent valuation, the company may appoint a registered valuer to assess the machinery's value. The valuer may consider the machinery's age, physical condition, remaining useful life, replacement cost, market demand, and technological obsolescence.

The resulting report can provide relevant evidence for the auditor's assessment of the reported amount.

However, the valuation report does not replace the statutory auditor's responsibilities. The auditor must independently evaluate whether the valuation evidence is appropriate and whether the financial statements comply with the applicable accounting framework.

What Happens If Legal Requirements Are Not Followed?

Non-compliance with Section 247 and the applicable valuation rules can have serious consequences. Section 247 provides for penalties where a valuer contravenes the section or the rules made under it. A valuer acting with fraudulent intent may also face more serious consequences, including imprisonment and fines.

Where a valuer is convicted under the relevant provision, the law also provides for refund of remuneration and liability for damages arising from incorrect or misleading statements in the valuation report. For companies, appointing an ineligible professional or failing to follow the required appointment process can create compliance concerns and affect the reliability of valuation evidence used in financial reporting.

Compliance Checklist Before Appointing a Registered Valuer

Before proceeding with an appointment, a company should verify a few important requirements.

First, determine whether the valuation is legally required under the Companies Act or applicable rules. Next, identify the relevant asset class and verify the professional's IBBI registration.

The company should also ensure that the appointment is approved by the Audit Committee or, where it does not exist, the Board of Directors. Any potential conflict of interest should be examined and disclosed.

Finally, the engagement should clearly define the valuation purpose, scope, valuation date, reporting requirements, professional fees, and expected timeline.

Conclusion

The appointment of a registered valuer in financial audits depends on the nature and legal requirements of the valuation assignment. Section 247 of the Companies Act, 2013 does not make registered valuation compulsory for every statutory audit, but it requires an appropriately registered professional whenever a valuation is required under the Act.

Companies should follow the prescribed appointment process, verify the valuer's asset-class registration, ensure independence, and obtain a properly documented valuation report. Understanding these requirements helps companies maintain regulatory compliance and provides auditors with reliable valuation evidence when assessing relevant financial statement items.