Drashti Dave
Background
The Companies Act, 2013 requires reporting of frauds by an auditor that are found in the course of the performance of an audit to the central government. Sub-section 12 of Section 143, read with Rule 13 of the Companies (Audit and Auditors) Rules, 2014 of the Companies Act, 2013 contains such provisions. Section 143(12) is applicable with effect from 14th December, 2015.
The extant norms provide that 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. Rule 13 of the Companies (Audit and Auditors) Rules, 2014 prescribes time and manner of reporting of fraud to the government.
The Amendment to the Companies (Audit and Auditors) Rules, 2014
Recently, the Ministry of Corporate Affairs (MCA) amended the Rule 13 of the Companies (Audit and Auditors) Rules, 2014 vide notification no. G.S.R. 972(E). Now, the revised Rule 13 prescribes amount of fraud that should be reported, time-limit and the manner of reporting of fraud.
Reporting of frauds by auditor involving amount of Rs. 1 crore or more
The revised norms provide that 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. In other words, now a statutory auditor requires to report only those frauds which involve an amount of Rs. 1 Crore or more. Auditor should report such frauds as soon as possible but not later than 62 days of his knowledge about the frauds. Earlier there was no such limit on amount of frauds and a statutory auditor had to report frauds which involve any amount immediately but not later than 60 days of his knowledge about the frauds.
Further, Sub-rule (2) of revised Rule 13 of the Companies (Audit and Auditors) Rules, 2014 provides that the auditor shall report fraud in the following manner:-
(i) The auditor should report the fraud, first of all, to the Board or the Audit Committee, as the case may be, within 2 days of his knowledge of the fraud, seeking their reply or observations within 45 days. Earlier, the auditor had to report to the Board or Audit Committee immediately.
(ii) Within 15 days of receipt of reply or observations of the Board or Audit Committee, the auditor shall send his report and his comments on such reply or observations along with such reply or observations to the central government. Earlier, the time-limit was same.
(iii) On non-receipt of reply or observations from the Board or Audit Committee within stipulated time of 45 days, the auditor shall send his report along with details of the report that was sent to the Board or Audit Committee for which he has not received any reply. Same provision was there in old Rule.
(iv) As in case of old Rule, the auditor should send his report along with other documents, as the case may be, to the Secretary, Ministry of Corporate Affairs in a sealed cover by Registered Post with Acknowledgement Due or by Speed post. It should be followed by an e-mail in confirmation of the sending.
(v) The auditor should prepare report in the format of Form ADT-4 and send that report on his letter-head signed by the auditor with his seal and shall indicate Membership Number of the auditor. The letter-head should contain postal address, e-mail address and contact number. There is no change vis-s-vis old Rule.
Sub-rule (3) of revised Rule 13 of the Companies (Audit and Auditors) Rules, 2014
It provides that in case of fraud involving an amount less than Rs. 1 Crore, the Auditor shall report the matter of fraud to the Audit Committee or to the Board within 2 days of his knowledge of the fraud. The report should specify the nature of the fraud with description, approximate amount of the fraud and parties involved in the fraud. In such case, as per Sub-rule (4), the Board shall disclose in its report (Board’s Report) the nature of fraud with description, approximate amount of the fraud, parties involved in the fraud and remedial action taken. Name of parties should be disclosed only when the Board or Audit Committee has not taken any remedial action against the fraud.
The provisions of both sub-rules, Sub-rule (3) and (4) of revised Rule 13 are new provisions. There were no such provisions in the old Rule 13. However, Section 143 requires reporting of frauds involving an amount less than the specified limit and requirement of disclosure by the Board in his report.
The provisions of revised Rule 13 of the Companies (Audit and Auditors) Rules, 2014 also apply, mutatis mutandis, to a Cost Auditor and a Secretarial Auditor.
Conclusion
Imposing a limit in terms of amount on reporting of fraud to the central government will reduce burden of the auditors as well as the Ministry of Corporate Affairs. The amendment has brought more clarity on reporting format, particulars to be reported and the manner of reporting.
SOURCE: Ministry of Corporate Affairs, New Delhi, Notification No. G. S. R. 972(E) , Dated: 14/12/2015.
