Under Section 143 of the Companies Act, 2013, 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 immediately report the matter to the Central Government within such time and in such manner as may be prescribed.

This was amended by Section 13 of the Companies Amendment Act, 2015 and this has been recently brought into force along with consequential changes to Companies (Audit and Auditors) Rules. Now, if an auditor of a company in the course of the performance of his duties as auditor, has reason to believe that an offence of fraud involving or is expected to involve individually an amount of INR 10 million or above, is being or has been committed against the company by its officers or employees, the auditor shall report the matter to the Central Government.

The auditor shall report the matter to the Central Government as under:-

  1. the auditor shall report the matter to the Board or the Audit Committee, as the case may be, immediately but not later than 2 (two) days of his knowledge of the fraud, seeking their reply or observations within forty-five days;
  2. 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 along with his comments (on such reply or observations of the Board or the Audit Committee) to the Central Government within 15 (fifteen) days from the date of receipt of such reply or observations;
  3. in case the auditor fails to get any reply or observations from the Board or the Audit Committee within the stipulated period of 45 (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 has not received any reply or observations;
  4. the report shall be sent to the Secretary, Ministry of Corporate Affairs in a sealed cover by Registered Post with Acknowledgment Due or by Speed Post followed by an e-mail in confirmation of the same;
  5. the report shall be on the letter-head of the auditor containing postal address, e-mail address and contact telephone number or mobile number and be signed by the auditor with his seal and shall indicate his Membership Number; and
  6. the report shall be in the form of a statement as specified in Form ADT-4.

The Amendment Act also provided that in case of a fraud involving lesser than INR 10 million, the auditor shall report the matter to the company’s audit committee constituted or to the Board, if there is no audit committee.

Furthermore, the companies, whose auditors have reported frauds to the audit committee or the Board but not reported to the Central Government, shall disclose the details about such frauds in the Board's report. In case of a fraud involving lesser than INR 10 million, the auditor shall report the matter to Audit Committee or to the Board immediately but not later than 2 (two)days of his knowledge of the fraud and he shall report the matter specifying the following:-

  1. Nature of Fraud with description;
  2. Approximate amount involved; and
  3. Parties involved.

The following details of each of the fraud reported to the Audit Committee or the Board during the year shall be disclosed in the Board’s Report: (a) Nature of Fraud with description, (b) Approximate Amount involved, (c) Parties involved, if remedial action not taken and (d) Remedial actions taken.

The provision of this rule shall also apply, mutatis mutandis, to a Cost Auditor and a Secretarial Auditor.

Source: http://www.mca.gov.in/Ministry/pdf/Amendement_Rules_14122015.pdf

VA View

Statutory auditors will now have to mandatorily report to the Centre all corporate frauds amounting to INR 10 million or above. By specifying a threshold of INR 10 million, the Corporate Affairs Ministry (MCA) has now done away with the requirement to report immaterial frauds to the Centre. For frauds involving amounts lower than INR 10 million, the statutory auditors now need to report this matter only to the audit committee of the company.

Prior to this Ministry move, the company law required statutory auditors to report to the Centre all frauds by the company or against it. By imposing a limit in terms of the amount on reporting of fraud to the Central Government will reduce the burden of the Auditors to report all immaterial frauds. The amendment has also brought more clarity on the format of reporting, particulars to be reported and the manner of reporting.