The National Financial Reporting Authority (NFRA) addressing the Auditors of the Entities, issued a circular on 26th June 2023 regarding the responsibilities of the Statutory Auditors in relation to the fraud in a company.
The NFRA has noticed that the Statutory Auditors were not fulfilling their duties while discharging their statutory functions in relation to reporting of fraud as mandated under the Companies Act, 2013 read with the relevant Rules and the applicable Standards on Auditing (SAs).
The Companies Act, the Companies (Auditor’s Report) Order (CARO) 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.
As per the regulations outlined in the Companies Act and its accompanying rules, it has been mandated by the authority that Statutory Auditors are required to notify instances of fraud or suspected fraud if they observe any suspicious activities, transactions, or operational circumstances within a company.
These indicators should raise reasonable doubts that an act of fraud has been or is being committed against the company by its officers or employees. Should such a situation arise, the Statutory Auditor must take the prescribed actions outlined in Rule 13 of the Companies (Audit and Auditors) Rules 2014. The process commences with the Auditor promptly reporting the matter to the Board/Audit Committee within a maximum of two days from becoming aware of the fraudulent incident.
Moreover, if a fraud is reported, and it is known or anticipated that the amount involved is one crore rupees or more, and the Statutory Auditor does not receive any response or observations from the Board/Audit Committee within a period of 45 days, the Auditor is required to send a report in the prescribed format, known as ADT-4, to the Secretary of the Ministry of Corporate Affairs, which is a department of the Government of India.
The authority was also stated that the Statutory Auditor is duty bound to submit Form ADT-4 to the Central Government under Section 143 (12) even in cases where the Statutory Auditor is not the first person to identify the fraud/suspected fraud.
Also stated that “Resignation does not absolve the Auditor of his responsibility to report suspected fraud or fraud as mandated by the law. The Statutory Auditor shall exercise his/her own professional skepticism while evaluating fraud, and need not be influenced by legal opinion provided by the Company or its Management.”
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