Brief Outline on Guidance Note on Reporting of Fraud U/s. 143(12) of Companies Act 2013

The article briefly explains the guidelines issued by the Auditing Assurance Standards Board of Institute of Chartered Accountants of India on Reporting of Fraud under Sec 143(12) of the Companies Act 2013.

The article briefly explains the guidelines issued by the Auditing Assurance Standards Board of Institute of Chartered Accountants of India on Reporting of Fraud under Sec 143(12) of the Companies Act 2013.

The Guidance Note provides an overview of reporting requirement u/s 143(12). It also provides detailed guidance w.r.t various aspects of this reporting requirement like requirements for reporting u/s 143(12), responsibility of management, responsibility of auditor, Issues for consideration by the auditors, Applicability of Standards on Auditing, Audit procedures Technical guidance, Appendices etc.

The explanation given in Sec 447 of the Companies Act 2013 says that-

“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;

1. Primary responsibility for the prevention and detection of fraud rests with-

a. those charged with governance of the entity

b. management

2. Persons covered under Sec 143(12) for reporting under Fraud

a. Statutory auditors of the company

b. Cost accountants in practice conducting cost audit

c. Company secretary in practice conducting secretarial audit

(including branch auditors)

Statutory auditor of the company performing attest services such as tax audit-to be reported in terms of Sec 143(12),if fraud is of material amount as per professional judgement of auditor

Statutory Provisions
SA 240- prescribed auditing standard as per Sec 143(10) Sec 143(12) of Companies Act 2013 Rule 13 Form ADT 4 CARO
Communication of fraud/ fraudulent matters to management Reporting to the Central Government/ Audit committee as the case may be, if an offence involving fraud is being or has been committed against the company by officers/ employees of the company. Specifies the manner for reporting the fraud to the Central Government Format and information to be included in such report. It does not require the auditor to discover the frauds on/ by the company but to inquire and present the frauds noticed/ reported during the year to management.
Suspected frauds by vendors, customers and other third parties Fraud by officers/ employees of the companyOfficer- includes any director, manager, KMP or any person on whose directions, the board or a single director is accustomed to act., Employee- persons who are on the payroll of the company

 3. Auditors appointed under the following statutes not covered under Sec 143(12) for reporting under Fraud

a. Tax Audit under Income Tax Act 1961

b. Sales Tax Audit

c. Vat Audit

d. Internal Auditors under Sec 138

4. Reporting of fraud by auditor- only if auditor is the first person to identify/note such instance in the course of performance of his duties as an auditor.

5. Review of steps taken by management –with respect to the reported instance of suspected offence involving fraud stated above, and if he is not satisfied with such steps, he should state the reasons for his dissatisfaction in writing.

6.Action not taken by management within 45 days of auditors request-If the management/those charged with governance fail to undertake appropriate additional procedures within 45 days of his request, the auditor would need to evaluate if he should report the matter to the Central Government

7. Commencement of reporting of Fraud by an auditor-reporting on fraud in the course of performance of duties as auditor, is applicable only when the auditor has sufficient reason to believe and has knowledge that a fraud has occurred or is occurring i.e., when the auditor has evidence that a fraud exists.

8. The requirements for reporting by auditors under Section 143(12) would apply even if the fraud is required to be/has been reported under any other statute or to any other Regulator

Also, we are aware, the Companies (Amendment) Bill, 2014 that was passed by the Lok Sabha, envisaged bringing in, by way of Rules, certain materiality thresholds in respect of reporting under section 143(12). However, the Bill is awaiting clearance by the Rajya Sabha. Accordingly, the provisions of section 143(12) stand as originally contained in the Companies Act, 2013. In this background, through this Guidance Note brings out the aforesaid fact, the auditors’ guidance is based on these existing provisions only. As and when the aforesaid Bill is passed by the Rajya Sabha, it will be reviewed if and where required.

Source-ICAI website

9. Reporting of fraud by an auditor relating to prior period-

a. fraud of previous year

b. found during the FY beginning on or after April 1, 2014

c. was not dealt with in the prior financial years

d. in the financial statements/ audit report/ board’s report

10.Responsibility of Management-

a. Inclusion in the board report under sec 134(5)- a responsibility statement 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.

b. the directors had laid down internal financial controls to be followed by the company and that such internal financial controls are adequate and were operating effectively.

11. Reporting procedure (Author may be contacted at rubneet@gmail.com)

Categories: Company Law


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