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Reporting of Fraud by Auditors

Reporting of fraud by auditors

We are all familiar with Scams and Frauds!

Even the Corporate Sector is not left untouched, and the alarming increase in fraud from Stayam to ABG Shipyard leads to not only decreasing investors’ interests but also keeping the deserving ones away from resources and support.

Not only investors of these industries and the corporate sectors but also the public at large must have an awareness of what constitutes fraud, what are the duties we, being Chartered Accounts, have towards the same, along with the procedures that Chartered Accountants need to adhere to in such situations. So, starting with what Fraud means, 

Meaning of Fraud
Fraud, as per sec 447 of the Companies Act, 2013, includes any act, omission,  concealment of any fact or abuse of post committed by a person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from or to injure the interests of the company and its stakeholder, whether or not there is any wrongful gain or wrongful loss. 

After understanding what constitutes fraud, we need to understand what we, auditors, are duty-bound to.

Duty of Auditors
Suppose during the course of audit, auditor has a reason to believe that an offence involving fraud u/s 447 is being/has been conducted, than as per sec 143(12) of the Companies Act. In that case, he shall immediately initiate the procedure to report the same to the appropriate authorities and to disclose the same as required under Rule 13 of Companies(Audit & Auditors) Rules, 2014.

Now, that we know that there are specific guidelines that are laid down by the Act, here is a glimpse of what those requirements are.

Guidelines for reporting Fraud by Auditors
For reporting fraud to the authorities, there is a procedure to be followed by the Auditors, which is specified under Rule 13 of Companies (Audit & Auditors)  Rules, 2014, and it states that:

If Fraud Amounts to 1 Cr or more:

  • The same shall be reported immediately within next two days to Board or Audit Committee constituted u/s 177, seeking their reply/ observations within 45 days.
  • This report then has to be forwarded to Central Govt. in form ADT-4 within the next 15 days with or without the observations of Board or Audit Committee constituted u/s 177 as the case may be including the fact of non-receipt of their observations in case of later.

If Fraud Amounts to less than 1 Cr:
It shall be reported immediately within the next two days to Board or Audit Committee seeking their observations within the next 45 days, and there is no such requirement of forwarding the same to the Central Government in this case. However, disclosures is required in the Board Report of specified details, which are:

  • Nature of fraud with its description.
  • Approximate amount Involved.
  • Parties involved if remedial action is not taken; and
  • Remedial action taken

The Auditor, for not reporting the same, shall be punishable with a fine not less than 1 lakh, which may extend to 25 lakhs which is the imposition of sec 143(12). 

Lastly, this rule also applies to Cost Audit u/s 148 and to Secretarial Audit u/s 204.

This is the result of ever-growing desires and an urge to have a competitive edge in the market that the frauds and scandals have gained a pace in our country and the entire world. Witnessing such unethical practices, our role as an Auditor is crucial as we are the one entrusted with the responsibility to report such frauds.

With the rapid change in technology and perpetrating minds, auditors need to pull up the socks and equip themselves and their teams to detect fraud and report them to discharge their duties well off professionally and as a citizen of our Nation.

At MAS, we assist our clients in dealing with internal audits; government audits of various corporate matters (company incorporation), statutory audits, ROC compliance, and company winding-up) in India by providing them adequate support and guidance from our end. If you have any questions or wish to know more about Reporting of fraud by auditors, kindly contact us.


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