The Ministry of Corporate Affairs (MCA) on Tuesday, February 25, 2020 notified the Companies (Auditor’s Report) Order, 2020 (CARO 2020) revamping the Companies (Auditor’s Report) Order, 2016 (CARO 2016) , making it mandatory for companies to disclose all complaints to the auditor while ushering enhanced due diligence and disclosures on the part of auditors.
RATIONALE BEHIND CARO 2020
The notification of Companies (Auditor Report) Order, 2020 (CARO 2020) is a major initiative taken by the Ministry of Corporate Affairs, Government of India in consultation with National Financial Regulatory Authority with the objective of restoring the trust of the various stakeholders in the financial statements of India.
Under the revised CARO 2020, auditors are now required to report more extensively on many crucial aspects including frauds, loan defaults, whistle blower complaints, evergreening of loans and benami properties.
Representation of funds, transfer of properties, ability to discharge liabilities, and disclosures on loans, guarantees, and investments of a company will now come under auditor scrutiny.
CARO 2020 has been introduced to overcome the lacuna in financial reporting & to avoid IL&FS like situation. MCA inevitably prosecuted Deloitte and BSR Associates based on the Serious Fraud Investigation Report (SFIO) for their failure to detect and report the scams that took place involving IL&FS and its 21 entities when they were the auditors of the IL&FS
Misappropriation of loans, guarantees and securities and violation of end-use terms by IL&FS led to a liquidity crisis. Some 88 cases of evergreening of loans were noted by the SFIO in its investigation of IL&FS. Evergreening of loan means granting new loans for repayment of old loans to prevent a default.
To curb similar corporate scams, the Ministry of Corporate Affairs has specified the understated items to be reported in auditor’s report.
APPLICABILITY OF CARO 2020
The criteria of eligibility of companies on which the CARO, 2020 shall be applicable has not been changed and hence it shall be applicable to all those companies on which CARO, 2016 was applicable.
It shall apply to every company including a foreign company as defined in clause (42) of section 2 of the Companies Act, 2013, except–
MATTERS TO BE SUBSUMED IN AUDITOR’S REPORT
To curb corporate scams, the Ministry of Corporate Affairs has specified following items on which an auditor must include a statement in its report, via recent notification on CARO 2020:
Whether the company has revalued its Property, Plant & Equipment (including Right to use assets) or intangible assets or both during the year.
The auditor is to report in detail on the investments made by the company in, any guarantee or security provided or any loans or advances in the nature of loans granted, secured or unsecured, to companies, firms, Limited Liability Partnerships or any other parties during the year that they are not prejudicial to the interests of the company.
The auditor shall report as to whether term loans were applied for the purpose for which the loans were obtained, in case of any discrepancy, the amount of loan so diverted and the purpose for which it is used shall also be reported.
REPERCUSSIONS OF CARO 2020 ON KMPs
While the disclosures are rigorous for auditors, they are stringent for Key Managerial Personnels (KMPs) as well. As a result, a KMP’s role would come under increased focus with regard to compliances with certain laws and rules. They should ensure sanity of financial information furnished to banks and proper systems and processes to detect non-compliance or an adverse financial position and take corrective measures.
Overall, the changes proposed under CARO 2020 will lead to greater transparency and faith in the financial affairs of companies. Though it is the responsibility of auditors to report on matters prescribed in CARO, companies will get affected as they need to provide the underlying information.
The CARO, 2020 is expected to improve the overall quality of reporting by the statutory auditors on the financial statements of the companies and thereby lead to greater transparency and faith in the financial affairs of the companies. By this, it is expected to have a greater inflow of investment by and in Indian companies, in pursuance of its objective of strengthening the corporate governance framework under the Companies Act, 2013 to attain the national objective of becoming a $ 5 Trillion economy.
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|Jaya Sharma-SinghaniaFounder- Jaya Sharma & Associates
|Neha Vaishya Associate
Jaya Sharma & Associates