Auditing

Corporate Fraud Reporting

Increase in corporate accounting frauds is being debated loudly in last decade with likes of Ketan
Parek Security scam, Satyam, Saradha Chit Fund, NSEL .and so on. Primarily responsibility for
prevention & detection of fraud rests with the management and those charged with governance. The
Companies Act 2013 had also made the statutory auditor a whistle blower and report to the Central
Government the frauds committed against the company by its officers or employees regardless of
materiality of the amount of fraud involved. The Central government has now modified the reporting
procedure and also introduced the concept of materiality through amendment by Section 13 of the
Companies Amendment Act, 2015 and consequential changes to Companies (Audit and Auditors)
Rules. Read on to know more
All frauds against the company by its officers or employees to
be reported by auditors to Board or Audit Committee, as the
case may be, immediately but not later than 2 (two) days of his
knowledge of the fraud

Fraud amount
=> R1 Crores

Fraud amount
< R1 Crores

Company to respond to auditors

within 45 days

Company to report each fraud details in

Board's report

CA. Bhavin Kapadia and

CA. Nirav Gosalia

(The authors are members

of the Institute. They can be
reached at Nirav_gosalia86@
yahoo.co.in)

www.icai.org

Auditors to report to Central Government within 15 days from the

date of receipt of company's reponse or within 15 days from the end of
45 days if no response is received from the company).

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Auditing
Existing provision
Amended provision
Our comments / views
i) Specified the monetary limit for reporting of fraud by the auditor to the Central Government
The auditor of the company, If an auditor of a company, in This is a positive development /
in the course of the the course of the performance
change as frauds below the threshold
performance of his duties as of his duties as a statutory
limit need not be reported to the
auditor, has sufficient reason auditor, has a reason to believe
Central Government.
to believe that an offence that an offence of fraud which The MCA has laid down ceiling limit
involving fraud is being or involves or is expected to involve
for reporting of fraud irrespective of
has been committed against individually an amount of Rs.
the size of the company.
the company by officers or 1 Crore and above is being or The MCA may clarify the term
employees of the company, has been committed against
individual frauds and circumstances
than auditor shall report the company by its officers or
under which multiple frauds of similar
the matter to the Central employees should be reported to
nature / type could be aggregated to
Government.
the Central Government.
determine the limit of R1 crore.
It should be noted that the
responsibility of reporting the fraud
is only if the fraud has been identified
by the auditor i.e. if the management
has informed about the fraud to the
auditor, then auditors are not required
to report on the same to the Board
of Directors / Audit Committee /
Central Government.
Under the erstwhile Rule 13(1),
the auditor was required to have
sufficient reason to believe before
reporting the fraud (even though
section 143(12) mentioned reason
to believe). Under the new rule the
reporting now will have to be done
on the basis of reason to believe. As
a result of amendment, situations will
arise where before sufficient reasons
have been gathered to the effect
that fraud has been committed, the
Auditor will be obligated to report
the event to the Board/ ACM.
ii) Time limit of 2 days for reporting of fraud by the auditor to Audit Committee or Board
The auditor shall report The auditor shall report all The time line of 2 days given to
the matter related to fraud fraud (against the company by
auditors for estimating the quantum
(against the company by its officers or employees) to the
of fraud is a herculean task.
its officers or employees) Board or the Audit Committee,
Practically, auditor would not be in a
to the Board or the Audit as the case may be, immediately
position to quantify the amount.
Committee, as the case but not later than 2 days of
may be, immediately after auditors knowledge of the fraud.
auditor comes to knowledge There is no change in time limit
of the fraud, seeking their of 45 days for obtaining response
reply or observations within from company.
45 days.

102

THE CHARTERED ACCOUNTANT

AUGUST 2016

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Auditing
Existing provision
Amended provision
Our comments / views
iii) Matters to be included while reporting the fraud to Audit Committee or Board where fraud
amount is less than R1 Crore
Details to be reported were In case of a fraud (committed The auditor may not have the
not specified.
against the company by its
expertise to determine the intricacies
officers or employees) involving
of fraud and it would be pre-mature
lesser than Rs. 1 Crore, the
for auditors to identify the parties
auditor within 2 days shall report
involved in 2 days of knowledge of
the matter to Audit Committee
fraud.
or to the Board specifying the The auditor would require legal
following:assistance / advice from legal experts
(a) Nature of Fraud with
before initiating such a reporting.
description;
Identification of all the parties
(b) Approximate amount
involved may not be practical in a
involved: and
deep routed fraud.
(c) Parties involved.
iv) Matters to be included while reporting the fraud in the Boards Report where fraud amount is less
than R1 Crore
No such requirements.
In case of a fraud (against the Details of each fraud below R1 Crore
company by its officers or
would now be available in the public
employees) involving lesser than
domain and in the annual report of
Rs. 1 Crore, the following details
the company.
of each of the fraud reported Details of fraud for R1 Crore and
to the Audit Committee or the
above is not mandated to be reported
Board shall be disclosed in the
under the Boards report, however
Boards Report:
as a better practice and corporate
(a) Nature of fraud with
governance it may be included.
description
(b) Approximate amount
involved
(c) Parties involved, if remedial
action not taken and
(d) Remedial actions taken
The ICAI had earlier issued Guidance Note on fraud
reporting which minutely covers various aspects and
as per the guidelines given thereunder the auditors
have to apply "professional skepticism" before
flagging such cases to the government and take into
account the measures already taken by the companies
internally. During the course of performance of
the duties as auditor, the auditors will also have to
consider the Standard on Auditing 240 The Auditors
Responsibilities relating to frauds in an Audit of
Financial Statements. The stakeholders will look
forward positively that the auditors will now be extra
cautious in carrying out the attest functions with

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integrity and in right spirit. The Central Government

based on the frauds reported may hand over to SFIO
i.e. SERIOUS FRAUD INVESTIGATION OFFICE
to further investigate the serious financial frauds
involving public interest.
Corporates should also play a vital role and take
initiatives for training their employees on fraud
prevention and educating the code of ethics.
It is anticipated that like India being polio free
country, corporate financial fraud will be eradicated
from its roots and abide by the principles of GOOD
CORPORATE GOVERNANCE which will aid our
nation and all stakeholders.

THE CHARTERED ACCOUNTANT

When virtues are pointed out first, flaws seem less insurmountable. - Judith Martin

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