CA Anuj Gupta
Definitions/Explanation of Fraud
According to SA 240 “The Auditor’s Responsibility Relating to Fraud in an Audit of Financial Statement” An intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage.
Explanation of section 447 of The Companies Act, 2013 fraud in relation to affairs of a company or any body corporate, includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss.
Sub-section 12 of Section 143 of the Companies Act, 2013 states, “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 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 within such time and in such manner as may be prescribed.”
Concept of Materiality for Reporting on Fraud
The Companies (Amendments) Bill, 2014 that has been introduced and approved by the Lok Sabha to amend certain provisions of the Companies Act, 2013 includes an amendment to the provisions relating to auditor reporting on frauds. As per this amendment, in case of a fraud involving lesser than a specified amount, the auditor shall report the matter to the Audit Committee constituted under Section 177 of the Companies Act, 2013 or to the Board in other cases within such time and in such manner as may be prescribed. Accordingly, only those frauds, where the amount exceeds the specified amount, shall be reported to the Central Government. However, in the case of frauds that are reported by the auditors only to the Audit Committee or the Board of Directors, where the amounts involved are less than the threshold that may be specified by the Ministry of Corporate Affairs, the details of such fraud will need to be disclosed in the Board’s report in such manner as may be prescribed. It may be noted that as on date of this Article, the above amendment is pending approval of the Rajya Sabha and Presidential assent.
Requirement of CARO, 2015 With Respect to Fraud
According to clause (xii) of CARO, 2015 auditor needs to report whether any fraud on or by the company has been noticed or reported during the year; If yes, the nature and amount involved is to be indicated.
Procedure for Report to Central Government
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 immediately but not later than sixty days of his knowledge and after following the procedure indicated herein below:
(i) Auditor shall forward his report to the Board or the Audit Committee, as the case may be, immediately after he comes to knowledge of the fraud, seeking their reply or observations within forty-five days;
(ii) 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 of receipt of such reply or observations;
(iii) 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 failed to receive any reply or observations within the stipulated time.
(2) 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.
(3) The report shall be on the letter-head of the auditor containing postal address, e-mail address and contact number and be signed by the auditor with his seal and shall indicate his Membership Number.
(4) The report shall be in the form of a statement as specified in Form ADT-4.
Persons Requiring to Report on Fraud
Reporting requirement under Section 143(12) is only for the statutory auditors of the company, cost accountant in practice, conducting cost audit under Section 148 of the Act; and to the company secretary in practice, conducting secretarial audit under Section 204 of the Act.
The provisions of sub-section (12) of Section 143 read with Rule 13 of the Companies (Audit and Auditors) Rules, 2014 regarding reporting of frauds by the auditor shall also extend to a branch auditor appointed under Section 139 to the extent it relates to the concerned branch.
Responsibility for the Prevention and Detection of Fraud
Primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the entity and management. In the context of the 2013 Act, this position is reiterated in Section 134(5) which states that the Board report shall include a responsibility statement, inter alia, that the directors had taken proper and sufficient care for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities.
Based on the above, it may be considered that Section 143(12) envisages the auditor to report to the management and thereafter to the Central Government an offence involving fraud against the company by its officers or employees only if he is the first person to identify/note such instance in the course of performance of his duties as an auditor.
Required Professional Skepticism and follow SAs Requirements
For Detection of fraud professional required to use their professional skepticism while doing audit. It may be possible not to detect acts that have intent to injure the interests of the company or cause wrongful gain or wrongful loss, unless the financial effects of such acts are reflected in the books of account/financial statements of the company. For example,
- An auditor may not be able to detect if an employee is receiving pay-offs for favouring a specific vendor, which is a fraudulent act, since such pay-offs would not be recorded in the books of account of the company
Therefore, the auditor shall consider the requirements of the SAs, insofar as it relates to the risk of fraud, including the definition of fraud as stated in SA 240, in planning and performing his audit procedures in an audit of financial statements to address the risk of material misstatement due to fraud.
Consequences Not to Comply With Requirements
If any auditor does not comply with the provisions of Sub-section 143(12), he shall be punishable with fine of at least one lakh rupees, which may extend to twenty-five lakh rupees.
Any contrary view is welcomed.
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