CS S. Dhanapal

*Changes came into effect

Under Section 143 of the Companies Act 2013, every auditor of a company shall have a right of access at all times to the books of account and vouchers of the company, whether kept at the registered office of the company or at any other place and shall be entitled to require from the officers of the company such information and explanation as he may consider necessary for the performance of his duties as auditor.

♠ Amongst other matters, auditor can specifically inquire into following matters:

a. whether loans and advances made by the company on the basis of security have been properly secured and whether the terms on which they have been made are prejudicial to the interests of the company or its members;

b. whether transactions of the company which are represented merely by book entries are prejudicial to the interests of the company;

c. where the company not being an investment company or a banking company, whether so much of the assets of the company as consist of shares, debentures and other securities have been sold at a price less than that at which they were purchased by the company;

d. whether loans and advances made by the company have been shown as deposits; 138 Accounts, Audit & Auditors

e. whether personal expenses have been charged to revenue account;

f. where it is stated in the books and documents of the company that any shares have been allotted for cash, whether cash has actually been received in respect of such allotment, and if no cash has actually been so received, whether the position as stated in the account books and the balance sheet is correct, regular and not misleading.

♠ The auditor of a company which is a holding company shall also have the right of access to the records of all its subsidiaries in so far as it relates to the consolidation of its financial statements with that of its subsidiaries.

♠ The auditor is required to make a report to the members of the company. More about the audit report is discussed subsequently.

♠ Every auditor is required to comply with the auditing standards.

♠ Duty to report fraud is discussed below.

♠ All notices of, and other communications relating to, any general meeting shall be forwarded to the statutory auditor of the company, and the auditor shall, unless otherwise exempted by the company, attend either by himself or through his authorised representative, who shall also be qualified to be an auditor, any general meeting and shall have right to be heard at such meeting on any part of the business which concerns him as the auditor.

♠ The provisions of section 143 shall mutatis mutandis apply to— (a) the cost accountant in practice conducting cost audit under section 148; or (b) the company secretary in practice conducting secretarial audit under section 204.

REPORTING OF FRAUD BY AUDITORS – CHANGES NOTIFIED

Provisions of Section 13 the Companies (Amendment) Act, 2015 (21 of 2015), that amend Sections 143 of the Companies Act, 2013 have come into force vide MCA Notification S.O. 3388(E), dated December 14, 2015 which has been issued in this regard.

Revised section 143(12) read with the Companies (Audit and Auditors) Amendment Rules, 2015 as follows:

In section 143 of the principal Act, for sub-section (12), the following sub-section shall be substituted, namely:—

“(12) Notwithstanding anything contained in this section, if an auditor of a company in the course of the performance of his duties as auditor, has reason to believe that an offence of fraud involving such amount or amounts as may be prescribed, is being or has been committed in the company by its officers or employees, the auditor shall report the matter to the Central Government within such time and in such manner as may be prescribed:

Provided that in case of a fraud involving lesser than the specified amount, the auditor shall report the matter to the audit committee constituted under section 177 or to the Board in other cases within such time and in such manner as may be prescribed:

Provided further that the companies, whose auditors have reported frauds under this sub-section to the audit committee or the Board but not reported to the Central Government, shall disclose the details about such frauds in the Board’s report in such manner as may be prescribed.”

It may be noted that consequential amendments have also been made in Companies (Audit and Auditors) Rules, 2014 by Notification No. G.S.R. 972(E), dated 14-12-2015 vide Companies (Audit and Auditors) Amendment Rules, 2015 as follows:

In the Companies (Audit and Auditors) Rules, 2014 (hereinafter referred to as the principal rules),-

(i) For rule 13, the following rule shall be substituted, namely:-

“13. Reporting of frauds by auditor and other matters:

(1) If an auditor of a company, in the course of the performance of his duties as statutory auditor, has reason to believe that an offence of fraud, which involves or is expected to involve individually an amount of rupees one crore or above, is being or has been committed against the company by its officers or employees, the auditor shall report the matter to the Central Government.

(2) The auditor shall report the matter to the Central Government as under:-

(a) the auditor shall report the matter to the Board or the Audit Committee, as the case may be, immediately but not later than two days of his knowledge of the fraud, seeking their reply or observations within forty-five days;

(b) on receipt of such reply or observations, the auditor shall forward his report and the reply or observations of the Board or the Audit Committee along with his comments (on such reply or observations of the Board or the Audit Committee) to the Central Government within fifteen days from the date of receipt of such reply or observations;

(c) in case the auditor fails to get any reply or observations from the Board or the Audit Committee within the stipulated period of forty-five days, he shall forward his report to the Central Government along with a note containing the details of his report that was earlier forwarded to the Board or the Audit Committee for which he has not received any reply or observations;

(d) the report shall be sent to the Secretary, Ministry of Corporate Affairs in a sealed cover by Registered Post with Acknowledgement Due or by Speed Post followed by an e-mail in confirmation of the same;

(e) the report shall be on the letter-head of the auditor containing postal address, e-mail address and contact telephone number or mobile number and be signed by the auditor with his seal and shall indicate his Membership Number; and

(f) the report shall be in the form of a statement as specified in Form ADT-4.

(3) In case of a fraud involving lesser than the amount specified in sub-rule (1), the auditor shall report the matter to Audit Committee constituted under section 177 or to the Board immediately but not later than two days of his knowledge of the fraud and he shall report the matter specifying the following:- (a) Nature of Fraud with description; (b) Approximate amount involved; and (c) Parties involved.

(4) The following details of each of the fraud reported to the Audit Committee or the Board under sub-rule (3) during the year shall be disclosed in the Board’s Report:-

(a) Nature of Fraud with description;

(b) Approximate Amount involved;

(c) Parties involved, if remedial action not taken; and

(d) Remedial actions taken.

(5) The provision of this rule shall also apply, mutatis mutandis, to a Cost Auditor and a Secretarial Auditor during the performance of his duties under section 148 and section 204 respectively.”

DUTY TO REPORT FRAUD (SECTION 143(12) –

In view of the above, the changes pertaining to provisions relating to reporting of fraud by auditors are as under;

  • If an auditor of a company, in the course of the performance of his duties as auditor, has sufficient reason to believe that an offence involving fraud, is being or has been committed against/in the company by officers or employees of the company, he shall report the matter in the manner stated hereinafter.
  • The provision of this rule shall also apply, mutatis mutandis, to a cost auditor and a secretarial auditor during the performance of his duties under section 148 and section 204 respectively.
  • The provisions regarding reporting of fraud by the auditor shall also extend to branch auditor to the extent it relates to the concerned branch.
  • No duty to which an auditor of a company may be subject to shall be regarded as having been contravened by reason of his reporting the matter as referred above if it is done in good faith.
  • Fraud, which involves or is expected to involve individually an amount of Rs. 1 Crore or above – To be reported to Central Government
  • Auditor shall forward his report to the Board or the Audit Committee, as the case may be, immediately but not later than 2 days of his knowledge of the fraud, seeking their reply or observations within 45 days.
  • On receipt of such reply or observations the auditor shall forward his report and the reply or observations of the Board or the Audit Committee along with his comments on the reply or observations of the Board or the Audit Committee to the Central Government within 15 days of receipt of such reply or observations.
  • In case the auditor fails to get any reply or observations from the Board or the Audit Committee within the stipulated period of 45 days, he shall forward his report to the Central Government along with a note containing the details of his report that was earlier forwarded to the Board or the Audit Committee for which he has not received any reply or observations within the stipulated time.
  • The report shall be on the letter-head of the auditor containing his postal address, e-mail address and contact telephone or mobile number and be signed by the auditor with his seal and shall indicate his Membership Number and be sent to the Secretary, Ministry of Corporate Affairs in a sealed cover by Registered Post with Acknowledgement Due or by Speed post followed by an e-mail in confirmation of the same.
  • The report shall be in the form of a statement as specified in Form ADT-4.
  • Fraud, which involves or is expected to involve individually an amount of less than Rs. 1 Crore – To be reported to Audit Committee/Board of Directors
  • Matter to be reported immediately but not later than 2 days of his knowledge specifying:

(a) Nature of Fraud with description;

(b) Approximate amount involved; and

(c) Parties involved.

  • Following disclosures to be made in Board’s Report:

(a) Nature of Fraud with description;

(b) Approximate Amount involved;

(c) Parties involved, if remedial action not taken; and

(d) Remedial actions taken.

Penalty for failure to disclose fraud;

As per Section 143(12), an Auditor is duty bound that if in the course of the performance of his duties as auditor, he has reason to believe that an offence involving fraud is being or has been committed against the company by officers or employees of the company, he shall immediately report the matter to the Central Government. In case of any failure on his part to comply with this duty, he shall be punishable with fine which shall not be less than Rs.1,00,000/- but which may extend to Rs.25,00,000/-.

(Written by S.Dhanapal, Senior Partner, S Dhanapal & Associates, Chennai, Council Member, HCC & Council Member, SIRC – ICSI)

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