NFRA: Representation on Circular issued by NFRA regarding responsibilities of statutory auditors to report fraud

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NFRA: Representation on Circular issued by NFRA regarding responsibilities of statutory auditors to report fraud

Tejasvi

@tejasvi

November 29, 2023

Public Policy

S. 143(12) of Companies Act, 2013 (Companies Act) read with Rule 13 of Companies (Audit and Auditors) Rules, 2014 (Rules) casts responsibility on the auditor of a company to report instances of fraud involving amount of INR 1 crore or above by its officer or employees to the Central government (in form ADT-4). In case of fraud involving an amount less than INR 1 crore, the auditor is required to report the matter to Audit Committee or Board of Directors of the company within 2 days of his knowledge of fraud.

As per the guidance note issued by Institute of Chartered Accountants of India (ICAI) on reporting of fraud under S. 143(12) of Companie Act in February 2016 (ICAI Guidance Note), the requirement to report fraud under S. 143(12) of Companies Act is only for:

Frauds done by employees or officers of the Company and not by third party such as vendors, customers, etc.
Frauds that financially affect the company.
Frauds which are identified by auditors during performance of an audit.

The ICAI guidance note on S. 143(12) specifically states that the auditors are required to report only those instances of fraud done by employees or officers of a company, where auditor is the first person to identify such events and not otherwise. It further states that if a fraud has already been reported or has been identified/detected by the management or through company’s vigil/whistle blower mechanism and has been/is being remediated/dealt with by them and such case is informed to the auditor, then auditor is not required to report it under S. 143(12), since he has not per se identified the fraud.

Para 4.2 of Circular No. NF-25013/2/2023 dated June 26, 2023, issued by NFRA (NFRA Circular) mandates statutory auditors to submit Form ADT-4 to the Central Government under S. 143(12) even in cases where the statutory auditor is not the first person to identify the fraud/suspected fraud.

We have made a representation to NFRA highlighting that the NFRA circular deviates from the provisions of S. 143(12) of Companies Act and ICAI guidance note. NFRA Circular requires auditor to report all frauds, whereas Companies Act read with ICAI guidance note requires auditor to report only those frauds which are detected first-hand by them. This all-encompassing reporting requirement prescribed by the NFRA Circular goes beyond what is covered under S. 143(12) read with ICAI guidance note.

It is important to note that the intent of S. 143(12) of Companies Act is to identify and report fraud committed by employees or officers of a company such as directors, promoters, Key Managerial Personnel or Senior Management Personnel.

S. 143(12) of Companies Act read with ICAI guidance note cover frauds that are identified by the auditor during performance of audit and places onus on them to report such frauds. In instances where frauds are detected by other parties, neither S. 143(12) of the companies act nor ICAI guidance note require auditors to disclose such frauds. In such cases, ICAI guidance note highlights the steps to be taken by auditors to see if the fraud has been appropriately addressed by the management.

We have requested NFRA to use reference to S.143(12) of Companies Act to refer to reporting of frauds that are identified by the auditor during performance of audit. For other frauds, the NFRA circular should not refer to S. 143(12) and instead refer to the ICAI guidance to reiterate the steps to be taken by auditors to see if the fraud has been appropriately addressed by the management. Clarity on this aspect will provide certainty to the industry and will facilitate ease of doing business in India.

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Tejasvi

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