There was some news last month that The Ministry of Corporate Affairs (MCA) is expected to take a major step to revamp the auditor’s report that accompanies company balance-sheets, placing more onus on statutory auditors to fulfill their professional responsibilities. The move was expected to be enacted this month.
In 2019, the audit fraternity came in for severe criticism for its role in the blowout of IL&FS, collapse of Dewan Housing & Finance Ltd, and the crisis at PMC Bank. Several large divergences were also observed in the audited accounts of YES Bank and other banks. Year 2019 also saw a spate of resignations by both statutory and internal auditors. All this and much more happened due to which lots of questions started coming on the Independence of Auditor.
MCA-appointed Group was formed, which was tasked to look into the current CARO and suggest changes, has submitted the draft recommendations to the Corporate Affairs Ministry post which, the National Financial Reporting Authority — the regulator of the audit profession met MCA appointed group and deliberated on the changes needed to the existing CARO. Thereafter, the CARO 2020 was notified yesterday.
MCA has notified new CARO 2020 wherein all the existing clauses are there. Some new clauses are added and some are amended. There are various reporting requirements on the auditor now.
Below is a brief analysis of the same and comparison between CARO 2015, CARO 2016 AND CARO 2020 as under:
1. If company has given any loans and advances to any party and same has been recovered or not as per stipulated terms is to be given by auditor. Further, details of loans given should be provided. This is intended curbed the problem of diverting funds as well as Money laundering . It is specially incorporated so as to save banks NPA.
2. A specific format has been prescribed for auditors to report the period and the amount of default by the company in repayment of loans or other borrowings
3. Another clause requires to report as to whether any transactions not recorded in the books of account have been surrendered or disclosed as income during the year in the tax assessments under the Income Tax Act, 1961, if so, whether the previously unrecorded income has been properly recorded in the books of account during the year;
4. One more clause provides for reporting as to whether during any point of time of the year, the company has been sanctioned working capital limits in excess of five crore rupees, in aggregate, from banks or financial institutions on the basis of security of current assets; whether the quarterly returns or statements filed by the company with such banks or financial institutions are in agreement with the books of account of the Company, if not, give de tails. Caro further requires to report whether Inventory and debtors submitted to banks, for working Capital Limit, are matching with books of accounts or not.
5. Reporting on revaluation of Property, Plant and Equipments by company
6. Reporting of proceedings under the Benami Transactions* (Prohibition) Act, 1988.
7. Reporting of investments in or providing of any guarantee or security or granting any loans or advances.
8. Loans overdue for more than 90 days, evergreening of loans, reporting on any loan default, etc.
9. Reporting of compliances with RBI directives and the provisions the Companies Act with respect to deemed deposits.
10. Discrepancies of 10 percent or more in the aggregate of each class of inventory noticed during physical verification of inventory would have to be reported,” apart from specific details on whether a company has been sanctioned working capital limits in excess of Rs 5 crore in a particular financial year.
11. Reporting with respect to transactions not recorded in the books of account but now surrendered or disclosed as income in the income tax proceedings.
12. An auditor has to report whether a company is a declared willful defaulter and whether term loans were diverted for any purpose other than for which the amount was raised.
13. An auditor has to consider whistle-blower complaints received during a year by the company in the audit as well as report whether the company has conducted any non-banking financial or housing finance activities without a valid certificate of registration from the Reserve Bank of India (RBI).
14. Reporting on internal audit system
15. Reporting on cash losses incurred in the financial year and immediately preceding financial year
16. Reporting on resignation of the statutory auditors
17. An auditor has to render opinion based on various aspects that “no material uncertainty exists as on the date of the audit report that company is capable of meeting its liabilities existing at the date of balance sheet as and when they fall due within a period of one year from the balance sheet date
18. Reporting transfer of unspent CSR amount to Fund specified in Schedule VII
Author’s Take :
Most important and long lasting change in CARO is that Inventory and debtors submitted to banks, for working Capital Limit, are matching with books of accounts or not. This has indirectly cast responsibility of certifying the details submitted to banks for wc limit of 5 crore or more. It will have long lasting effects. It may be noted that auditors do not have access to bank records and most of the time data is in soft format. No one can confirm its authenticity whether its same that is shared with bank or otherwise.
Expectations are that with the latest CARO in place, significant improvement in the overall quality of reporting by auditors on the financial statements of the companies would be seen.
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