Regulatory updates

On 26 June 2023, the National Financial Reporting Authority (NFRA) issued a circular regarding statutory auditors’ responsibilities in relation to fraud in a company. Following are some of the important points discussed in the circular:

• The circular reiterates that the auditor has a responsibility to report fraud or suspected fraud under the Companies Act, 2013¹ Section 143(12) of the Companies Act, 2013 and related Rules place certain reporting obligations on the auditor in relation to frauds. , the Companies (Auditor’s Report) Order (CARO) 2020² Clause (xi) of CARO 2020 requires auditors to make statements relating to reporting of fraud in his/her report. and SA 240, The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements. The circular also emphasises that resignation does not absolve an auditor of his/her responsibility to report fraud or suspected fraud as mandated by the law
• Statutory auditors have a mandatory obligation to report fraud or suspected fraud if they observe any 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, he/she should initiate the steps prescribed under Rule 13 of the Companies (Audit and Auditors) Rules, 2014, i.e., reporting the matter to the board/audit committee within two days of his/her knowledge of the fraud
• In situations, wherein the reporting of a fraud involves or is expected to involve individually an amount of rupees one crore or above, and the statutory auditor fails to get any reply/observations from the board/audit committee within 45 days, then he/she should forward a report in the specified form i.e., ADT-4 to the MCA secretary. This requirement would also be applicable in cases wherein the statutory auditor is not the first person to identify the fraud/suspected fraud
• Additionally, the circular also highlights that the statutory auditor should exercise his/her own professional skepticism while evaluating fraud and need not be influenced by legal opinion provided by the company or its management.

To access the text of the circular, please click here