Fraud reporting by Auditor & Penal Consequences for non-reporting on the auditor

Audit is an onerous duty on the auditor. As per Rule 13 to the Companies (Audit and Auditors) Amendment Rules, 2015, if an auditor has “reason to believe” that fraud, which involves or could potentially involve individually an amount of rupees one crore or above, is being or has been committed against the company, the auditor needs to report the matter to the Central Government within 60 days of his or her knowledge of such a fraud. There is a Penalty for failure to disclose fraud. As per Section 143(12), an Auditor is duty bound that if in the course of the performance of his duties as auditor, he 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. In case of any failure on his part to comply with this duty, he shall be punishable with fine which shall not be less than Rs.1,00,000/- but which may extend to Rs.25,00,000/-.

The reporting of fraud is done only if it is detected during the course of the audit by the auditor and not already known to the management as per the ICAI Guidance Note on Reporting on Fraud under Section 143(12) of the Companies Act, 2013 (Revised 2016) (the “Rules”). But, the same has not been endorsed by MCA in the Rules relating to fraud reporting.

Now, under Section 143 of the Companies Act 2013, every auditor of a company shall have a right of access at all times to the books of account and vouchers of the company, whether kept at the registered office of the company or at any other place and shall be entitled to require from the officers of the company such information and explanation as he may consider necessary for the performance of his duties as auditor.

More particularly, Auditor can specifically inquire into following matters:

a) whether loans and advances made by the company on the basis of security have been properly secured and whether the terms on which they have been made are prejudicial to the interests of the company or its members;

b) whether transactions of the company which are represented merely by book entries are prejudicial to the interests of the company;

c) Where the company not being an investment company or a banking company, whether so much of the assets of the company as consist of shares, debentures and other securities have been sold at a price less than that at which they were purchased by the company;

d) whether loans and advances made by the company have been shown as deposits; 138 Accounts, Audit & Auditors

e) whether personal expenses have been charged to revenue account;

f) where it is stated in the books and documents of the company that any shares have been allotted for cash, whether cash has actually been received in respect of such allotment, and if no cash has actually been so received, whether the position as stated in the account books and the balance sheet is correct, regular and not misleading.

 

It may be recalled that the provisions of section 143 shall mutatis mutandis apply to— (a) the cost accountant in practice conducting cost audit under section 148; or (b) the company secretary in practice conducting secretarial audit under section 204.

Revised section 143(12) read with the Companies (Audit and Auditors) Amendment Rules, 2015 as follows:

In section 143 of the principal Act, for sub-section (12), the following sub-section shall be substituted, namely: —

“(12) 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 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:

Provided that in case of a fraud involving lesser than the specified amount, the auditor shall report the matter to the audit committee constituted under section 177 or to the Board in other cases within such time and in such manner as may be prescribed:

Provided further that the companies, whose auditors have reported frauds under this sub-section to the audit committee or the Board but not reported to the Central Government, shall disclose the details about such frauds in the Board’s report in such manner as may be prescribed.”

Consequential amendments have also been made in Companies (Audit and Auditors) Rules, 2014 by Notification No. G.S.R. 972(E), dated 14-12-2015 vide Companies (Audit and Auditors) Amendment Rules, 2015 as follows:

In the Companies (Audit and Auditors) Rules, 2014 (hereinafter referred to as the principal rules),-

(i) For rule 13, the following rule shall be substituted, namely:-

“13. Reporting of frauds by auditor and other matters:

(1) 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.

(2) The auditor shall report the matter to the Central Government as under:-

(a) the auditor shall report the matter to the Board or the Audit Committee, as the case may be, immediately but not later than two days of his knowledge of the fraud, seeking their reply or observations within forty-five days;

(b) 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 from the date of receipt of such reply or observations;

(c) 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 has not received any reply or observations;

(d) 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;

(e) the report shall be on the letter-head of the auditor containing postal address, e-mail address and contact telephone number or mobile number and be signed by the auditor with his seal and shall indicate his Membership Number; and

(f) the report shall be in the form of a statement as specified in Form ADT-4.

(3) In case of a fraud involving lesser than the amount specified in sub-rule (1), the auditor shall report the matter to Audit Committee constituted under section 177 or to the Board immediately but not later than two days of his knowledge of the fraud and he shall report the matter specifying the following:- (a) Nature of Fraud with description; (b) Approximate amount involved; and (c) Parties involved.

(4) The following details of each of the fraud reported to the Audit Committee or the Board under sub-rule (3) during the year shall be disclosed in the Board’s Report:-

(a) Nature of Fraud with description;

(b) Approximate Amount involved;

(c) Parties involved, if remedial action not taken; and

(d) Remedial actions taken.

(5) The provision of this rule shall also apply, mutatis mutandis, to a Cost Auditor and a Secretarial Auditor during the performance of his duties under section 148 and section 204 respectively.”