CA. (Dr.) DEBASHIS MITRA
M.Com, LL.B, F.C.A, A.C.M.A, A.C.S, DISA (ICAI) Ph.d
Introduction
Section 143(12) of the Companies Act, 2013 (hereinafter referred to as the Act) provides 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 involving fraud is being or has been committed against the company by officers or employees of the company, he shall report the matter to the Central Government immediately within such time and in such manner as may be prescribed.
Section 143(13) of the Act further provides that no duty to which an auditor of a company may be subject to (e.g. duty of confidentiality under the CA Act, 1949) shall be regarded as having been contravened by reason of his reporting the matter as above if it is done in good faith.
Section 143(14) extends obligation cast by section 143 mutas mutandis to Cost Auditors appointed under section 148 as well as Secretarial Auditors appointed under section 204.
Non-Compliance with the provisions of Section 143(12) shall be punishable with fine which shall be not less than Rs. 1,00,000/- but which may extend to Rs. 25,00,000/- [Section 143(15)].
Section 447 of the Act further provides that any person who is found to be guilty of fraud, shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud:
Provided that where the fraud in question involves public interest, the term of imprisonment shall not be less than three years.
What is Fraud?
According to Section 447 of the Act “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.
‘Wrongful gain’ according to the aforesaid section means the gain by unlawful means of property to which the person gaining is not legally entitled.
‘Wrongful loss’ means the loss by unlawful means of property to which the person losing is legally entitled.
How To Report Fraud
Rule 13 of the Companies (Audit & Auditors) Rules, 2014 provides that
a) For the purpose of sub-section (12) of section 143, in case the auditor has sufficient 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 report the matter to the Central Government immediately but not later than sixty days of his knowledge and after following the procedure indicated herein below:
(i) the auditor shall forward his report to the Board or the Audit Committee, as the case may be, immediately after he comes to knowledge of the fraud, seeking their reply or observations within forty-five days;
(ii) 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 alongwith his comments (on such reply or observations of the Board or the Audit Committee) to the Central Government within fifteen days of receipt of such reply or observations;
(iii) 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 failed to receive any reply or observations within the stipulated time.
b) 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.
c) The report shall be on the letter-head of the auditor containing postal address, e-mail address and contact number and be signed by the auditor with his seal and shall indicate his Membership Number.
d) The report shall be in the form of a statement as specified in Form ADT-4.
Some Faqs Concerning Fraud Reporting
Is Fraud Reporting applicable to all types of Companies?
Reply: Yes, the Reporting Requirements as above is applicable to all kinds of Companies incorporated under the Act or under any previous Company Law.
Are both material & immaterial frauds to be reported?
Reply: The Draft Rules had distinguished between Material & Immaterial Frauds but the Companies (Audit & Auditors) Rules, 2014 does not make any such distinction & hence all frauds irrespective of materiality need to be reported at present. For changes proposed in the Companies Amendment Bill, 2014 refer to the reply to the last query in this Article.
Is the Auditor required to report in ADT-4 even when he is satisfied with the reply of the Management that there is no Fraud?
Reply: According to Clause 12 of Form ADT-4 the Auditor is required to state whether he is satisfied with the reply of Board or Audit Committee. Hence, in my view ADT 4 needs to be completed & sent even when the Auditor is satisfied with the reply of the Management.
For which year is this provision relating to Fraud Reporting applicable?
Reply: According to Circular No. 1/19/2013-CL-V dated 04-04-2014 issued by MCA the Financial Statements, Auditor’s Report and Boards’ Report in respect of Financial Years that commenced earlier than 1st April 2014 shall be governed by the relevant provisions/schedules/ Rules of the Companies Act, 1956 and that in respect of Financial Years commencing on or after 1st April 2014 the provisions of the new Act shall apply. Hence the Fraud Reporting provisions need to be complied with in respect of Audit relating to Financial years commencing on or after 1st April, 2014.
SA-240 (The Auditors’ Responsibilities Relating to Fraud in an Audit of Financial Statements) issued by The Institute of Chartered Accountants of India (ICAI) defines Fraud as ‘an intentional act by one or more individuals among management, those charged with governance, employees or third parties involving the use of deception to obtain an unjust or illegal advantage’. But the definition contained in Section 447 is different. How does the Statutory Auditor reconcile.
Reply: An Auditor carrying out Audit under the Act cannot turn a blind eye to the definition of fraud provided in the Act. This definition will have primacy. But reference to SA-240 and other applicable Auditing & Assurance Standards is a must.
Even under Companies (Auditor’s Report) Order, 2003 (CARO,2003) the Statutory Auditor was required to Report Fraud. How does the situation change post Companies Act, 2013 ?
Reply: Para. XXI of the aforesaid Order requires an Auditor to Report the amount of fraud in the event fraud on or by the company has been noticed or reported during the year. ICAI in its Statement on CARO,2003 had clearly stated that the clause does not require the auditor to discover the frauds on the Company & by the Company. The scope of Auditor’s Enquiry under this clause is restricted to frauds noticed or reported during the year. The use of the words noticed or reported indicates that the management of the Company should have the knowledge about the frauds that have occurred during the period covered by the Auditor’s Report.
In the case of Fraud Reporting under section 143(12) of the Act, the Auditor in the course of the performance of his duty as auditor should have reason to believe that an offence involving fraud is being or has been committed against the company by officer or employees of the Company.
It will be evident from above, that words ‘noticed or reported’ as used under CARO, 2003 are missing from section 143(12). Here the stress is on the Auditor having a reason to believe that a fraud is being or has been committed.
It should also be noted that unlike in the case of CARO,2003 where fraud on or by the Company is required to be reported, in the case of section 143(12) of the Act only frauds committed or being committed against the company by officers or employees of the company need to be reported.
With such stringent penal consequences, does it mean that test checking is now no longer possible.
Reply: In my view the Act does not mandate that one hundred percent checking be done in the case of Statutory Financial Audit. But if Test checking is adopted then compliance with the Auditing & Assurance standards is a must. While selecting the Audit sample the Auditor must specially refer to SA 530 (Revised) - Audit Sampling in addition to applicable AAS.
Are the reporting Requirements expected to change consequent to the Companies Amendment Bill, 2014?
Reply: In the aforesaid Bill, an amendment has been proposed in section 143 (12) of the Act. According to the proposed amendment in the case of a fraud 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 & in such manner as may be prescribed.
In the case of Companies, where the frauds are not required to be reported to the Central Government, the details regarding fraud are required to be disclosed in the Board’s Report. Consequent changes have been proposed in section 134 (3) of the Act relating to Board Report.
Hence once the aforesaid Bill is enacted only frauds above a threshold limit are required to be reported to the Central Government. The Threshold limit is yet to be notified.