What is a fraud reporting obligation?
Fraud reporting obligations refer to the legal or regulatory requirements that individuals, organizations, or entities have to report instances of fraud to the appropriate authorities or stakeholders. These obligations can vary depending on the jurisdiction, industry, and specific circumstances, but they generally serve the purpose of preventing, detecting, and addressing fraudulent activities
Mandatory fraud reporting obligation
Under the Companies Act 2013 in India, statutory auditors have certain mandatory reporting obligations concerning fraud. These obligations are outlined in Section 143 of the Companies Act, which pertains to the powers and duties of auditors and auditing standards. Specifically, Section 143(12) and (13) of the Companies Act 2013 require statutory auditors to report on frauds they detect during their audit:
- Section 143(12) – Reporting of Fraud by Statutory Auditors:
- Statutory auditors are required to report instances of fraud committed against the company to the Central government and audit Committee or Board. This reporting obligation applies to frauds that involve or are expected to involve an amount of rupees one crore or above.
- If, during their audit, the auditors come across any fraud involving an amount of less than one crore or such other amount as may be prescribed, they are required to report it to the Audit Committee or the Board.
- Section 143(14)- These provisions are also applicable to the Cost accountant in practice conducting cost audit under section 148 or the company secretary in practice conducting secretarial audit under section 204.
- Additional Reporting Obligations under CARO 2020: Clause (xi) of Companies (Auditor’s Report) Order, 2020 also requires auditors to make the following statements relating to reporting of fraud in his/her report.
(a) whether any fraud by the company or any fraud on the company has been noticed or reported during the year, if yes, the nature and the amount involved are to be indicated;
(b) whether any report under sub-section (12) of section 143 of the Companies Act has been filed by the auditors in Form ADT-4 as prescribed under rule 13 of Companies (Audit and Auditors) Rules, 2014 with the Central Government;
(c) whether the auditor has considered whistle-blower complaints, if any, received during the year by the company.
- Auditor’s Responsibilities under SA 240: The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements elaborately deals with the auditor’s responsibilities relating to fraud in an audit of financial statements. The SA requires the auditor to maintain professional skepticism throughout the audit and states: “By SA 200, the auditor shall maintain professional skepticism throughout the audit, recognizing the possibility that a material misstatement due to fraud could exist, notwithstanding the auditor’s experience of the honesty and integrity of the entity’s management and those charged with governance.”
- The standard also highlights the importance of effective communication. The guidance provided in paras A59-A66 of SA 240, details the reporting of the fraud/suspected fraud to Management, Those Charged with Governance (TCWG), and Regulatory and Enforcement Authorities.
Reporting of Other Matters by Statutory Auditors:
In addition to reporting fraud, statutory auditors are required to report certain other matters to the Audit Committee or Board of Directors of the company. These matters include:
- Any material related-party transactions or non-compliance with provisions of the Companies Act that have come to their notice.
- Any suspected or actual material fraud within the company.
- Any failure to correct previously reported weaknesses in the company’s internal
- financial controls.
Statutory auditors are required to include these reporting obligations in their audit reports, and they should be diligent in fulfilling these duties. Failure to report fraud or other matters as required by the Companies Act can result in penalties for both the auditors and the company.
It’s important to note that statutory auditors are expected to exercise professional skepticism and conduct a thorough examination of the company’s financial statements to detect any instances of fraud. If they come across any fraud or other reportable matters, they must take the necessary steps to fulfill their obligations as specified under the Companies Act 2013.
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