Comparison of CARO 2016 and CARO 2020

Companies Auditor Report Order (CARO) Rules, 2020 - Release Date 25th Feb 2020

The Ministry of Corporate affairs released the Companies (Auditor's Report) Order, 2020 on 25th February 2020. This order has been issued in supersession of the Companies (Auditor's Report) Order, 2016, released on 29th March 2016. The applicability is for reporting on financial statements of companies whose financial year commences on or after 1st April 2019. CARO 2020 has been issued after consultation with the National Financial Reporting Authority constituted under section 132 of the Companies Act, 2013.

There has been number of new requirements on which Auditors has to report under Section 143 of the Companies Act, 2013 on the account of every company to which this Order applies and the same is expected to result in greater transparency into the operations of the Organization. It’s a welcome step by MCA and I hope that the same would prove beneficial to the stakeholders at large. The total number of clauses in this edition of CARO is 21.

Applicability

This Order shall apply to every company including a foreign company as defined in clause (42) of section 2 of the Companies Act, 2013 (18 of 2013) [hereinafter referred to as the Companies Act], except–

(i) a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949);

(ii) an insurance company as defined under the Insurance Act,1938 (4 of 1938);

(iii) a company licensed to operate under section 8 of the Companies Act;

(iv) a One Person Company as defined in clause (62) of section 2 of the Companies Act and a small company as defined in clause (85) of section 2 of the Companies Act; and

(v) a private limited company, not being a subsidiary or holding company of a public company, having a paid up capital and reserves and surplus not more than one crore rupees as on the balance sheet date and which does not have total borrowings exceeding one crore rupees from any bank or financial institution at any point of time during the financial year and which does not have a total revenue as disclosed in Scheduled III to the Companies Act (including revenue from discontinuing operations) exceeding ten crore rupees during the financial year as per the financial statements.

Provided this Order shall not apply to the auditor’s report on consolidated financial statements except clause (xxi) of paragraph 3.

Matters to be included in the Auditor’s report-

Matters to be included in auditor's report- The auditor's report on the accounts of a company to which this Order applies shall include a statement on the following matters, namely:-

Property, Plant and Equipment - (PPE) Clause 3 (i)

i. (a) (A) whether the company is maintaining proper records showing full particulars, including quantitative details and situation of Property, Plant and Equipment;

(B) whether the company is maintaining proper records showing full particulars of intangible assets;

(b) whether these Property, Plant and Equipment have been physically verified by the management at reasonable intervals; whether any material discrepancies were noticed on such verification and if so,whether the same have been properly dealt with in the books of account;

(c) whether the title deeds of all the immovable properties (other than properties where the company is the lessee and the lease agreements are duly executed in favour of the lessee) disclosed in the financial statements are held in the name of the company, if not, provide the details thereof in the format below:-

(d) whether the company has revalued its Property, Plant and Equipment (including Right of Use assets) or intangible assets or both during the year and,if so, whether the revaluation is based on the valuation by a Registered Valuer; specify the amount of change, if change is 10% or more in the aggregate of the net carrying value of each class of Property, Plant and Equipment or intangible assets;

(e) whether any proceedings have been initiated or are pending against the company for holding any benami property under the Benami Transactions (Prohibition) Act, 1988 (45 of 1988) and rules made thereunder, if so, whether the company has appropriately disclosed the details in its financial statements;

Observation-

Reporting on Intangibles has been made mandatory which was not there in erstwhile order. Disclosures with respect to ownership or on lease basis are required with respect to all the Immovable properties appearing in the Balance Sheet. In case the property appearing in the BS is not in the name of the Company, appropriate reasons for the same needs to be disclosed. Change of 10% or more arising out of revaluation of any assets ( including Right of Use assets) in the aggregate of the net carrying value of each class of Property, Plant and Equipment or intangible assets and whether the revaluation is as per the valuation done by a Registered Valuer needs to be reported.

Further in case of any benami transactions for which any proceedings have been initiated or are pending, the auditor needs to report on whether appropriate disclosures are made in the Financial Statements.

Inventory - Clause 3 (ii)]

(a) whether physical verification of inventory has been conducted at reasonable intervals by the management and whether, in the opinion of the auditor, the coverage and procedure of such verification by the management is appropriate; whether any discrepancies of 10% or more in the aggregate for each class of inventory were noticed and if so, whether they have been properly dealt with in the books of account;

(b) whether during any point of time of the year, the company has been sanctioned working capital limits in excess of five crore rupees, in aggregate, from banks or financial institutions on the basis of security of current assets; whether the quarterly returns or statements filed by the company with such banks or financial institutions are in agreement with the books of account of the Company, if not, give details;

Observation

For the first time, discrepancy threshold of 10% or more in the aggregate for each class of inventory has been provided in respect of the physical verification conducted by the Management versus the numbers in the financial statements.

New reporting on the working capital loan in excess of five crore rupees, in aggregate, from banks or financial institutions on the basis of security of current assets with respect to compliance with the quarterly returns or statements filed by the company has been provided in the new Order.

Investments/ Providing any guarantee or security or granted loans and advances -Clause 3 (iii)

whether during the year the company has made investments in, provided any guarantee or security or granted any loans or advances in the nature of loans, secured or unsecured, to companies, firms, Limited Liability Partnerships or any other parties, if so,-

(a) whether during the year the company has provided loans or provided advances in the nature of loans,or stood guarantee,or provided security to any other entity [not applicable to companies whose principal business is to give loans], if so, indicate-

(A) the aggregate amount during the year, and balance outstanding at the balance sheet date with respect to such loans or advances and guarantees or security to subsidiaries, joint ventures and associates;

(B) the aggregate amount during the year, and balance outstanding at the balance sheet date with respect to such loans or advances and guarantees or security to parties other than subsidiaries, joint ventures and associates;

(b) whether the investments made, guarantees provided, security given and the terms and conditions of the grant of all loans and advances in the nature of loans and guarantees provided are not prejudicial to the company's interest;

(c) in respect of loans and advances in the nature of loans, whether the schedule of repayment of principal and payment of interest has been stipulated and whether the repayments or receipts are regular;

(d) if the amount is overdue, state the total amount overdue for more than ninety days, and whether reasonable steps have been taken by the company for recovery of the principal and interest;

(e) whether any loan or advance in the nature of loan granted which has fallen due during the year, has been renewed or extended or fresh loans granted to settle the overdues of existing loans given to the same parties, if so, specify the aggregate amount of such dues renewed or extended or settled by fresh loans and the percentage of the aggregate to the total loans or advances in the nature of loans granted during the year [not applicable to companies whose principal business is to give loans];

(f) whether the company has granted any loans or advances in the nature of loans either repayable on demand or without specifying any terms or period of repayment, if so, specify the aggregate amount, percentage thereof to the total loans granted, aggregate amount of loans granted to Promoters, related parties as defined in clause (76) of section 2 of the Companies Act, 2013;

Observation-

This clause covers reporting of loan given to not only entities covered in Sec 189 of the Companies Act, 2013 but the same is extended to any loan provided not covered under Sec 189 of the Act as well. This will have far reaching impact and the disclosures needs to be seen in coming times.

Also it has been newly inserted that in case a new loan has been taken to repay the already running loan or the current loan is extended for a particular period, the same as a percentage of the Total loan outstanding at year end needs to be reported. This is not applicable to companies whose principal business is to give loans.

Further the clause also mandates reporting of cases where loans or advances have been given on either repayable on demand or without specifying any terms or period of repayment and the percentage of the same to the total loan outstanding at the year end.

Compliance with Sec 185 and 186 of the Companies Act -Clause 3 (iv)

in respect of loans, investments, guarantees, and security, whether provisions of sections 185 and 186 of the Companies Act have been complied with, if not, provide the details thereof;

Observation-

No change when compared to erstwhile 2016 Order.

Acceptance of Deposits [Clause 3 (v)]

in respect of deposits accepted by the company or amounts which are deemed to be deposits, whether the directives issued by the Reserve Bank of India and the provisions of sections 73 to 76 or any other relevant provisions of the Companies Act and the rules made thereunder, where applicable, have been complied with, if not, the nature of such contraventions be stated; if an order has been passed by Company Law Board or National Company Law Tribunal or Reserve Bank of India or any court or any other tribunal, whether the same has been complied with or not;

Observation

No change when compared to erstwhile 2016 Order.

Maintenance of Cost Records -Clause 3 (vi)

whether maintenance of cost records has been specified by the Central Government under sub-section(1) of section 148 of the Companies Act and whether such accounts and records have been so made and maintained;

Observation

No change when compared to erstwhile 2016 Order.

Depositing Statutory Dues -Clause 3 (vii)

(a) whether the company is regular in depositing undisputed statutory dues including Goods and Services Tax, provident fund, employees' state insurance, income-tax, sales-tax, service tax, duty of customs, duty of excise, value added tax, cess and any other statutory dues to the appropriate authorities and if not, the extent of the arrears of outstanding statutory dues as on the last day of the financial year concerned for a period of more than six months from the date they became payable, shall be indicated;

(b) where statutory dues referred to in sub-clause (a) have not been deposited on account of any dispute, then the amounts involved and the forum where dispute is pending shall be mentioned (a mere representation to the concerned Department shall not be treated as a dispute);

Observation-

Goods and Service Tax has been added to the list of the statutory dues.

Reporting of Transactions not covered in books of account -Clause 3 (viii)

whether any transactions not recorded in the books of account have been surrendered or disclosed as income during the year in the tax assessments under the Income Tax Act, 1961 (43 of 1961), if so, whether the previously unrecorded income has been properly recorded in the books of account during the year;

Observation-

New clause which covers reporting of transactions not covered in the books of account having been disclosed as income in the tax assessment and corresponding effect of the same in the financial statements. This is probably to cover transactions reported in Voluntary Disclosure Schemes which are bought by government from time to time.

Repayment of Loan -Clause 3 (ix)

(a) whether the company has defaulted in repayment of loans or other borrowings or in the payment of interest thereon to any lender, if yes, the period and the amount of default to be reported as per the format below:-

(b) whether the company is a declared willful defaulter by any bank or financial institution or other lender;

(c) whether term loans were applied for the purpose for which the loans were obtained; if not, the amount of loan so diverted and the purpose for which it is used may be reported;

(d) whether funds raised on short term basis have been utilized for long term purposes, if yes, the nature and amount to be indicated;

(e) whether the company has taken any funds from any entity or person on account of or to meet the obligations of its subsidiaries, associates or joint ventures, if so, details thereof with nature of such transactions and the amount in each case;

(f) whether the company has raised loans during the year on the pledge of securities held in its subsidiaries, joint ventures or associate companies, if so, give details thereof and also report if the company has defaulted in repayment of such loans raised;

Observation-

Firstly, previously lender wise details was required and there was no specific format. Now format has been provided to provide the principal and interest amount, delay period and remarks if any (probably covering Settlement expected to be done details). Also it says any lender is covered for reporting.

Secondly, auditor needs to specifically mention that the company is declared as a willful defaulter or not by any bank or financial institution or any lender whatsoever.

Thirdly, the reporting on whether term loans in the books of the company were applied for which the loans were procured and if not the amount and the reasons for deviation from purpose needs to be disclosed.

Fourthly, in case the company has taken any funds from any entity or person to meet the requirements of its subsidiaries, associates or joint ventures, the details needs to be provided for in the audit report.

Fifthly, in case any loan has been raised on the pledge of securities held in its subsidiaries, associates or joint ventures or associate companies, the details needs to be provided along with default in payment of the same.

This particular clause will provide the readers of the financial statements the total exposure of loan and will help in arriving at more accurate financial ratios and understanding financial projection and thereby enable effective decisions.

Money raised through IPO and further public offer -Clause 3 (x)

(a) whether moneys raised by way of initial public offer or further public offer (including debt instruments) during the year were applied for the purposes for which those are raised, if not, the details together with delays or default and subsequent rectification, if any, as may be applicable, be reported;

(b) whether the company has made any preferential allotment or private placement of shares or convertible debentures(fully, partially or optionally convertible )during the year and if so, whether the requirements of section 42 and section 62 of the Companies Act, 2013 have been complied with and the funds raised have been used for the purposes for which the funds were raised, if not, provide details in respect of amount involved and nature of non-compliance;

Observation-

Raising of money through preferential allotment or private placement of shares or convertible debentures has been added to the erstwhile raising of fund only by IPO or further public offer. The reporting with respect to the requirements under the Act and the subsequent utilization of the same needs to be disclosed. It is to be noted that the point b was covered under in Clause 3 (xiv) of the erstwhile order CARO 2016. So in effect no change when compared to last order.

Disclosure regarding Fraud -Clause 3 (xi)

(a) whether any fraud by the company or any fraud on the company has been noticed or reported during the year, if yes, nature and the amount involved is to be indicated;

(b) whether any report under sub-section (12) of section 143 of the Companies Act has been filed by the auditors in FormADT-4 as prescribed under rule 13 of Companies (Audit and Auditors) Rules, 2014 with the Central Government;

(c) whether the auditor has considered whistle-blower complaints, if any, received during the year by the company;

Observation-

Additional requirements to have the compliance done under Sec 143 of the Companies Act and the consideration of whistle blower complaints by the auditor needs to be reported.

Nidhi Company -Clause 3 (xii)

(a) whether the Nidhi Company has complied with the Net Owned Funds to Deposits in the ratio of 1: 20 to meet out the liability;

(b) whether the Nidhi Company is maintaining ten percent. unencumbered term deposits as specified in the Nidhi Rules,2014 to meet out the liability;

(c) whether there has been any default in payment of interest on deposits or repayment thereof for any period and if so, the details thereof;

Observation-

Default in payment by Nidhi company needs to be reported with adequate details.

Related Party Transaction -Clause 3 (xiii)

Whether all transactions with the related parties are in compliance with sections 177 and 188 of Companies Act where applicable and the details have been disclosed in the financial statements, etc., as required by the applicable accounting standards;

Observation-

No change when compared to erstwhile 2016 Order.

Internal Audit-Clause 3 (xiv)

(a) whether the company has an internal audit system commensurate with the size and nature of its business;

(b) whether the reports of the Internal Auditors for the period under audit were considered by the statutory auditor;

Observation-

This is a new requirement when compared to 2016 order which lays down the importance of Internal audit. Also reporting needs to be on whether the Internal audit report has been considered by the Statutory auditor. It is to be seen how this particular disclosure as the same is quite subjective and does not mention the parameters/ extent of coverage on which this reporting needs to be done.

Non -Cash Transaction -Clause 3 (xv)

whether the company has entered into any non-cash transactions with directors or persons connected with him and if so, whether the provisions of section 192 of Companies Act have been complied with;

Observation-

No change when compared to erstwhile 2016 Order.

Registration under Sec 45-IA of the Reserve Bank of India Act, 1934 -Clause 3 (xvi)

(a) whether the company is required to be registered under section45-IA of the Reserve Bank of India Act, 1934 (2 of 1934) and if so, whether the registration has been obtained;

(b) whether the company has conducted any Non-Banking Financial or Housing Finance activities without a valid Certificate of Registration (CoR) from the Reserve Bank of India as per the Reserve Bank of India Act,1934;

(c) whether the company is a Core Investment Company (CIC) as defined in the regulations made by the Reserve Bank of India, if so, whether it continues to fulfill the criteria of a CIC, and in case the company is an exempted or unregistered CIC, whether it continues to fulfill such criteria;

(d) whether the Group has more than one CIC as part of the Group, if yes, indicate the number of CICs which are part of the Group;

Observation-

Point b, c, d are newly inserted to report on any financing activities (NBFC or HFC) provided by a company without a valid certificate from Reserve Bank of India which is mandated by RBI Act.

Also reporting on whether company is a Core Investment Company (CIC) as defined in the regulations made by the Reserve Bank of India and if yes, the criteria or the conditions are being complied by the company.

Cash Losses -Clause 3 (xvii)

whether the company has incurred cash losses in the financial year and in the immediately preceding financial year, if so, state the amount of cash losses;

Observation-

Reporting of cash losses has been made mandatory to provide insights into the cash flows of the company as part of the audit report.

Resignation of Statutory Auditors -Clause 3 (xviii)

whether there has been any resignation of the statutory auditors during the year, if so, whether the auditor has taken into consideration the issues, objections or concerns raised by the outgoing auditors;

Observation-

This is a new requirement which mandates reporting of resignation by the Statutory Auditors ( Specifically Statutory Auditor is covered only) and further whether the new auditor has taken into consideration of the issues, objections or concerns raised by outgoing auditors needs to be reported. This again is subjective and will differ in reporting from company to company as there are no set parameters laid to enable this reporting. Recently there has been number of cases where the resignation of auditors happening on unearthing of financial scams and also stopping of non -audit services by firms who are statutory auditors. This reporting will provide insights which probably the financial statements might have missed out.

Financial ratios -Clause 3 (xix)

on the basis of the financial ratios, ageing and expected dates of realization of financial assets and payment of financial liabilities, other information accompanying the financial statements, the auditor's knowledge of the Board of Directors and management plans, whether the auditor is of the opinion that no material uncertainty exists as on the date of the audit report that company is capable of meeting its liabilities existing at the date of balance sheet as and when they fall due within a period of one year from the balance sheet date;

Observation-

This is a very onerous move which mandates auditors to report on the future financial projections of the company in the sense that the company does not face any material uncertainty on the date of the audit report and it will be capable of meeting its liabilities existing at the date of BS as per the due date within a period of one year from the BS date. This report factors into having financial modelling and projections to be done which was erstwhile missing earlier.

The materiality threshold is not defined and would vary company to company. It is suggested certain parameters be laid to define material thresholds which enables the understanding of financial projections and thereby help in effective and informed decisions.

Corporate Social Reporting Clause 3 (xx).

(a) whether, in respect of other than ongoing projects, the company has transferred the unspent amount to a Fund specified in Schedule VII to the Companies Act within a period of six months of the expiry of the financial year in compliance with second proviso to sub-section (5) of section 135of the said Act;

(b) whether any amount remaining unspent under sub-section (5) of section135 of the Companies Act, pursuant to any ongoing project, has been transferred to special account in compliance with the provision of subsection (6) of section 135 of the said Act;

Observation-

This is a new requirement again. It is to be noted that while MCA has not notified the proposed circular for transferring of unspent amount to a separate special bank account, the reporting of which has been mandatory as per CARO rules 2020. There is very high probability that the notification from MCA regarding CSR unspent amount will be rolled out on or before March 31 2020 to ensure that the reporting covers the financial year 2019-2020.

This clause will force companies to better regulate their CSR projects and be more responsible towards the society at large.

Qualifications or Adverse Remarks -Clause 3 (xxi)

whether there have been any qualifications or adverse remarks by the respective auditors in the Companies (Auditor's Report) Order (CARO) reports of the companies included in the consolidated financial statements, if yes, indicate the details of the companies and the paragraph numbers of the CARO report containing the qualifications or adverse remarks.

Observation-

Basis for unfavourable or qualified remarks -Clause 4

This is a new requirement which mandates reporting of companies ( ex -subsidiaries) which should be report in the consolidated financial statements ( ex- holding company), providing the details of such companies and the reference in their respect CARO report containing details of qualifications or adverse remarks.

(1) Where, in the auditor's report, the answer to any of the questions referred to in paragraph 3 is unfavourable or qualified, the auditor's report shall also state the basis for such unfavourable or qualified answer, as the case maybe.

(2) Where the auditor is unable to express any opinion on any specified matter, his report shall indicate such fact together with reasons as to why it is not possible for him to give his opinion on same

Observation-

No change when compared to erstwhile 2016 Order.

Overall, the changes are welcome and will result in greater transparency and immensely help the readers of the financial statements and the society at large.