Companies Act 2013: Fraud Reporting by Auditor

REPORTING OF FRAUD BY AN AUDITOR [Section 143(12) to (15) of the Companies Act, 2013]

The Companies (Amendment) Bill 2014 was passed by Lok Sabha on December 17’14.

According to the amendment, “the auditor would be required to report fraud to the Government above the mandated threshold limit. Any fraud below the threshold limit would have to be reported to the Audit Committee (AC) / Board.”

Further, the amendment also provides for the companies whose auditors have reported frauds under this sub-section to the AC or the Board but not reported to the Central Government (CG), shall disclose the details about such frauds in the Board’s report. The threshold limit has not been defined.

Time and manner of reporting

The auditor shall immediately report the matter to CG within such time and in such manner as may be prescribed i.e. according to Rule 13.

No liability of auditor

An auditor shall not be deemed to be guilty for breach of any of his duties by reason of his reporting any matter to CG if such reporting is done in good faith.

Provisions applicable to other auditors    

The provisions w.r.t reporting of fraud shall mutatis mutandis apply to-

ü  The cost accountant in practice conducting cost audit u/s 148; or

ü  The company secretary in practice conducting secretarial audit u/s 204.

Punishment for non-compliance

ü  Minimum Fine: Rs. 1,00,000

ü  Maximum Fine: Rs. 25,00,000.

Time and manner of reporting of fraud by auditor (Rule 13)

(1) When a fraud comes to the knowledge of the auditor, the auditor shall immediately forward his report to the AC.

(2) The Board is required to submit its reply or observations within 45 days.

(3) Within 15 days of receipt of such reply or observations, the auditor shall forward to CG-

• his report; and
• the reply or observations of the Board/ AC along with his comments.

(4) In case the auditor fails to get any reply or observations from the Board/ AC within 45 days, he shall forward his report to CG along with a note containing the details of his report that was earlier forwarded to the Board/ AC.

(5) The report shall be sent-

• to the Secretary, Ministry of Corporate Affairs (MCA)
• in a sealed cover by Registered Post with Acknowledgement Due or by Speed post.

(6) After the report is sent, an email shall also be sent to the Secretary, MCA in confirmation of the report sent.

(7) The report shall be on the letter-head of the auditor containing postal address, email address and contact number.

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

(9) The report shall be signed by the auditor with his seal and shall indicate his Membership Number.

(10) These provisions shall also apply, mutatis mutandis, to-

·       a cost auditor during the performance of his duties u/s 148; and

·       a secretarial auditor during the performance of his duties u/s 204.

Contributed by Shruti Agarwal