Fraud Reporting by Auditor to Government Under Companies Act, 2013

Corporate fraud is a major problem that is increasing both in its frequency and severity.

Research evidence has shown that growing number of frauds have undermined the integrity of financial reports, contributed to substantial economic losses, and eroded investors’ confidence regarding the usefulness and reliability of financial statements. The increasing rate of whitecollar crimes demands stiff penalties, exemplary punishments, and effective enforcement of law with the right spirit. Our country has also witnessed several corporate Frauds, few of them being the 5000 crore rupees Harshad Mehta scam in 1992, 7000 crore rupees Satyam fiasco in 2009, the 27000 crore rupees Sahara fraud case which started in 2010 and is subjudice in Supreme Court, till date.

Legal Language As per Section 143(12): Notwithstanding anything contained in this section, if any 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:

However, section 143(13) of the Act, 2013 specifically provides that disclosures of fraud to Central Government under Section 143(12) will not be considered as contravention of his duty, if done in good faith.

“NOTE DUTY IS WHEN THERE IS FRAUD AGAINST THE COMPANY AND NOT BY THE COMPANY.”

Procedure for Fraud Reporting: 

In case the auditor has sufficient 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 report the matter to the Central Government.

The auditor will inform within 60 sixty days of his knowledge and after following the procedure indicated herein below:

STEP-I

REPORT TO BOARD & AUDIT COMMITTEE:

Auditor shall forward his report to the Board of Directors or the Audit Committee, as the case may be, immediately after he comes to knowledge of the fraud, seeking their reply or observations within 45 forty-five days;

STEP-II

Report to government after reply of board:

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 45 fifteen days of receipt of such reply or observations;

STEP-III

Report to government if no reply received

In case the auditor fails to get any reply or observations from the Board or the Audit Committee within the stipulated period of 45 (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 failed to receive any reply or observations within the stipulated time.

Other Points to be kept in mind:

♠ 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.

♠ The report shall be on the letter-head of the auditor containing

• Postal Address,
• e-mail address and
• contact number and
• signed by the auditor with his seal and shall
• indicate his Membership Number.

♠ Report shall be in the form of a statement as specified in Form ADT-4.

(Author – CS Divesh Goyal, ACS is a Company Secretary in Practice from Delhi and can be contacted at csdiveshgoyal@gmail.com)

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