REPORTING OF FRAUD

Ministry of corporate Affairs issued a notification dated 14^th December 2015 and published here in the Gazette of India dated 15^th December 2015 regarding amendment in the Companies (Audit and Auditors) Rules, 2014.

The Companies (Audit and auditors) Amendment Rules, 2015 notified after notification of Section 13 of the Companies (Amendment) Act, 2015. Section 13 of the Companies (Amendment) Act, 2015 substitutes sub – section (12) of Section 143 with new sub – section as discussed earlier here. Text of amended sub – section is reproduced here:

“Notwithstanding anything contained in this section, 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 such amount or amounts as may be prescribed, is being or has been committed in the company by its officers or employees, the auditor shall report the matter to the Central Government within such time and in such manner as may be prescribed:

Provided that in case of a fraud involving lesser than the specified amount, the auditor shall report the matter to the audit committee constituted under section 177 or to the Board in other cases within such time and in such manner as may be prescribed:

Provided further that the companies, whose auditors have reported frauds under this sub-section 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 such manner as may be prescribed.”

The Companies (Audit and auditors) Amendment Rules, 2015 substitutes new rule for earlier Rule 13 of the Companies (Audit and auditors) Rules, 2014. We have already discussed here earlier rule. The earlier rules ceased to be effective with effect from 15^th December 2015, date of publication of new Rule.

Who will report?

Sub – section 143(12) as amended clearly say, the auditor shall report. Who is auditor? In absence of any other definition, a person appointed as such under Section 139 of the Companies Act, 2013 shall be auditor of the company.

However, sub –section 143(14), extend the application of whole Section 143, to “cost accountant in practice” conducting cost audit under Section 148 and “company secretary in practice” conducting secretarial audit under Section 204. Internal auditor is not auditor for the purpose of Section 143.

Sub – Rule (5) of newly amended Rule 13, reiterate the same provision of Section 143(14). The provision of rule 13 of these rules shall also apply, mutatis mutandis, to a Cost Auditor and a Secretarial Auditor during the performance of his duties under section 148 and section 204 respectively.

For the purpose of fraud reporting rules, auditor includes statutory auditor, secretarial auditor and cost auditor but not any other auditor. Wherever term statutory auditor” appears in these rules, it may be construed accordingly.

Report to whom

This is little bit interesting. Rule 13(2)(a) give the real reply. The auditor shall report the matter to the Board or to the Audit Committee. The auditor shall forward his report to Central Government in Certain cases; which involves or is expected to involve individually an amount of rupees one crore or above, is being or has been committed against the company by its officers or employees. All other report shall remain with the Board or audit committee and processed there only.

Forward the Report to Central Government

According to sub – Rule (1) of Rule 13 read with its sub – rule (2), if an auditor of a company, in the course of the performance of his duties as statutory auditor, has reason to believe that an offence of fraud, which involves or is expected to involve individually an amount of rupees one crore or above, is being or has been committed against the company by its officers or employees, the auditor shall (forward the) report (on) the matter to the Central Government.

This reasoned believe of auditor must be formed in course of the performance of his duties as auditor only. All reasons; audit evidences, documents, information, reports, management representations should have been collected and formed such believe in course of the performance of his duty as auditor. The fraud believe to be committed should be committed against company. The fraud believe to be committed should he committed by officers or employees.

A fraud committed by the company against any person is not reportable. A fraud committed against the company should not be committed by suppliers, service providers, customers, consultants, auditor or government officers. In such way, a management consultant performing substantial duties of management may come out of perview of this rule and not reportable.

A fraud is required to be forwarded to the Central Government only if it individually involve an amount of rupees one crore or above.

Process before forwarding

According to clause (a), (b) and (c) of sub – rule (2), auditor shall adopt following process up to forwarding his report to Central Government.

Step 1

The auditor shall report the matter to the Board or the Audit Committee, as the case may be, immediately but not later than two days of his knowledge of the fraud, seeking their reply or observations within forty-five days. [Rule 13(2)(a)]

Auditor has two day time to prepare and reporting the fraud to the Board or the Committee.

Step 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 fifteen days from the date of receipt of such reply or observations. [Rule 13(2)(b)]

The auditor shall forward the report within fifteen days from the reply or observations. From knowledge of fraud to forwarding of report total maximum time spent is (2+45+15 = 62 days).

Conditional Step 2

In case the auditor fails to get any reply or observations from the Board or the Audit Committee within the stipulated period of 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. [Rule 13(2)(c)]

How to forward report

The report shall be sent to the Secretary, Ministry of Corporate Affairs in a sealed cover by Registered Post with Acknowledgement Due or by Speed Post followed by an e-mail in confirmation of the same. [[Rule 13(2)(d)]

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. [Rule 13(2)(e)]

The report shall be in the form of a statement as specified in Form ADT – 4. [Rule 13(2)(f)]

Report to Board or Audit Committee

Where report is not required to be forward to the Central Government and merely required to report it to the Board or the Audit Committee, the report shall specify:

• Nature of fraud with description;
• Approximate amount involved; and
• Parties involved. [Rule 13(3)]

This report is not required to be in form ADT – 4.

Fraud Reporting in Board’s Report

According to Rule 13(4), following details of each of the fraud reported to the Audit Committee or the Board under sub-rule (3) during the year shall be disclosed in the Board’s Report:

• Nature of Fraud with description;
• Approximate Amount involved;
• Parties involved, if remedial action not taken; and
• Remedial actions taken.

The Board is not required to report in its board’s report matters forwarded to the Central Government, under sub – Rule (1) of Rule 13.

Form ADT – 4

Form ADT – 4 require following important information to be disclosed:

• Details of Company;
• Details of Auditors;
• Date of Appointment of auditor;
• Location of suspected offence;
• Full details and all required documents;
• Particulars of officers or employees;
• Basis on which fraud suspected;
• Reply from Board or Committee;
• Whether auditor satisfied
• Amount involved

Please note: This blog invite readers to share their comments, suggestions, hardship, queries and everything in comment section. This blog post is not a professional advice but just a knowledge sharing initiative for mutual discussion.