FRAUD REPORTING AS PER COMPANIES ACT 2013

A new focus area for members during the current audit season would be Frauds. Section 143(12) of the Companies Act, 1956 outlines the following responsibility on the Auditors:-

“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 his 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 maybe prescribed.?(Prescribed under Rule 13 of the Companies (Audit and Auditors) Rules, 2014).

To help members understand the reporting requirement of such frauds and their responsibilities, ICAI has issued a?Guidance Note on Reporting on Fraud under section 143(12) of the Companies Act, 2013″.

1. Responsibilities are limited to frauds which are undetected by the Management and which are committed by the employees or officers of the Company.
2. Accordingly, only reports identified by the Auditors requires reporting to the Central Government.
3. Third party frauds (vendors / Customers) are not covered by the reporting responsibility.
4. If any such fraud is noticed by the auditor during the course of his audit then the auditor has to immediately report to the Central Government within 60 days.
5. An Auditor has to consider the requirements of SAs to assess risk of fraud (SA 240).
6. Reporting is applicable only when an auditor has evidence that fraud exists.
7. Auditors responsibilities towards reporting also include:-
   • Corruption
   • Bribery
   • Money Laundering
   • Non-compliance with other Laws and Regulations
8. Auditors appointed under other statues like Tax Auditors, VAT Auditors are not covered under Section 143(12) for fraud reporting.
9. Internal Auditors are also not covered under Section 143(12) for fraud reporting.
10. Branch auditors are however responsible to report under Section 143(12) for frauds.

The GN requires “material” frauds to be reported in terms of Section 143(12) in the Audit Report.

In case fraud is noticed by the Auditors, following procedure prescribed in Rule 13 needs to be followed:-

1. Auditor to forward his report to the Board of Directors / Audit committee, immediately after he comes to know of the fraud, seeking their reply or observations within 45 days.
2. On receipt of such reply / observations auditor to forward his report and such reply / observation along with his comments to CG within 15 days.
3. In case the auditor fails to get any reply / observations from the Board / Audit committee within 45 days, he shall forward his report to the CG along with a note containing details of his report that was earlier forwarded to the Board / Audit Committee of which he failed to receive any reply within the stipulated time.
4. The report shall be sent to the Secretary, MCA in a sealed cover by Registered Post AD or by Speed Post followed by an e-mail in confirmation of the same.
5. The report shall be on the letter head of auditor containing postal and email address with his sign, seal and membership number.
6. The report shall be in the form as specified in Form ADT – 4.

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Prior to the changes, auditors needed to comment on frauds on or by the company which were noticed during the year, as part of the reporting as per the Companies (Auditor’s Report) Order, 2003 in the auditor’s report.

The scope of reporting is now different. Earlier, the reporting was to be done annually being part of the auditors’ report.

However, under the Companies Act, 2013 it is a real-time responsibility since reporting needs to be done 60 days from the time the auditor becomes aware of the fraud or suspected fraud.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Hope the information will assist you in your Professional endeavors. For query or help, contact: singh@carajput.com or call at 9555555480