Statutory Auditors’ Responsibilities inrelation to Fraud in a Company

Background:

National Financial Reporting Authority (NFRA) issued a circular on June 26, 2023, stating that auditors need to report frauds as per required laws and regulations stated in Companies Act, 2013 & respective auditing standards and they will not be absolved of their responsibility in case they resign.

NFRA’s Circular regarding Auditor’s Responsibilities:

As per Section 143 (12) of the Companies Act, 2013 read with Rule 13 of the Companies (Audit and Auditors) Rules, 2014, statutory auditors are under a mandatory obligation to report fraud or suspected
fraud if they observe suspicious activities, transactions or operating circumstances in a company that
indicate reasons to believe that an offence of fraud is being or has been committed against the
company by its officers or employees. In such an event, the statutory auditor shall initiate the steps
prescribed under Rule 13 of Companies (Audit and Auditors) Rules 2014, i.e.,

• If the amount involved is less than or equal to Rs. 1 crore, auditor must report the fraud to the
  board / audit committee within two days of his/her knowledge of the fraud; and
• If the amount involved is over Rs. 1 crore, auditor still must report the fraud to the board / audit
  committee within two days of his/her knowledge of the fraud and in case it does get a response
  from the board or the audit committee within 45 days, they shall report the fraud to the Ministry
  of Corporate Affairs in Form ADT-4.

The Companies (Auditor’s Report) Order, 2020 (CARO 2020) and the Standards on Auditing (SAs) place
mandatory reporting obligations on auditors to report fraud and / or suspected fraud to the Central
Government and the Board / Audit Committee. Further, auditors should exercise their “professional
skepticism”, as per SA 200, when they evaluate a fraud and should not be influenced by legal opinion
provided by the company or its management.
NFRA also stated that “there is a misconception amongst some auditors that resigning from an audit
engagement absolves them of their reporting obligations relating to fraud and the consequences under
Companies Act 2013 for non-reporting of fraud” Resignation to avoid any consequence under the
Companies Act, 2013 cannot be permitted.

Varsha Laur, Audit Associate, SW India