INTRODUCTION
Section 143(12) states, “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.
The reporting requirement under Section 143(12) is for the statutory auditors of the company and also equally applies to the cost accountant in practice, conducting cost audit under Section 148 of the Act; and to the company secretary in practice, conducting secretarial audit under Section 204 of the Act.
However, the provisions of Section 143(12) do not apply to other professionals who are rendering other services to the company. For example, Section 143(12) does not apply to auditors appointed under other statutes for rendering other services such as tax auditor appointed for audit under Income-tax Act; Sales Tax or VAT auditors appointed for audit under the respective Sales Tax or VAT legislations.
It may also be noted that internal auditors covered under Section 138 are not specified as persons who are required to report under Section 143(12). As per sub-rule (3) of Rule 12 of the Companies (Audit and Auditors) Rules, 2014, the provisions of sub-section (12) of Section 143 read with Rule 13 of the Companies (Audit and Auditors) Rules, 2014 regarding reporting of frauds by the auditor shall also extend to a branch auditor appointed under Section 139 to the extent it relates to the concerned branch. It may be noted that Section 143(12) includes only fraud by officers or employees of the company and does not include fraud by third parties such as vendors and customers.
THRESHOLD AND MANNER OF REPORTING
The amended Rule 13 provides the following manner of reporting to the Central Government:
(a) the auditor shall report 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;
(b) 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 Overview 5 Committee) to the Central Government within fifteen days from the date of receipt of such reply or observations;
(c) 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;
(d) 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 email in confirmation of the same.
(e) 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; and
(f) The report shall be in the form of a statement as specified in Form ADT-4.
In case of a fraud involving lesser than rupees one crore, the auditor shall report the matter to Audit Committee constituted under section 177 or to the Board immediately but not later than two days of his knowledge of the fraud and he shall report the matter specifying the following:-
a) Nature of Fraud with description;
b) Approximate amount involved; and
c) Parties involved.
The following details of each of the fraud reported to the Audit Committee or the Board under sub-rule (3) of amended Rule 13 during the year shall be disclosed in the Board’s Report:-
a) Nature of Fraud with description;
b) Approximate Amount involved;
c) Parties involved, if remedial action not taken; and
d) Remedial action taken.
AUDITORS’S RESPONSIBILITY FOR CONSIDERATION OF FRAUD IN AUDIT OF FINANCIAL STATEMENTS
Section 143(12) requires an auditor to report on fraud if in the course of performance of his duties as an auditor, the auditor has reason to believe that an offence of fraud is being or has been committed in the company by its officers or employees.
The definition of fraud as per SA 240 and the explanation of fraud as per Section 447 of the 2013 Act are similar, except that under Section 447, fraud includes ‘acts with an intent to injure the interests of the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss
The auditor shall consider the requirements of the SAs, insofar as it relates to the risk of fraud, including the definition of fraud as stated in SA 240, in planning and performing his audit procedures in an audit of financial statements to address the risk of material misstatement due to fraud.
Reporting on Frauds Detected by the Management or Other Persons and already Reported under Section 143(12) by Such Other Person
Section 143(12) envisages the auditor to report to the Audit Committee under section 177 of the Companies Act, 2013 or to the Board of Directors and thereafter, where applicable, to the Central Government an offence of fraud in the company by its officers or employees only if he is the first person to identify/note such instance in the course of performance of his duties as an auditor.
Accordingly, in case a fraud has already been reported or has been identified/detected by the management or through the company’s vigil/whistle blower mechanism and has been/is being remediate/dealt with by them and such case is informed to the auditor, he will not be required to report the same under Section 143(12) since he has not per se identified the fraud
Since reporting on fraud under Section 143(12) is required even by the cost auditor and the secretarial auditor of the company, it is possible that a suspected offence involving fraud may have been reported by them even before the auditor became aware of the fraud. Here too, if a suspected offence of fraud has already been reported under Section 143(12) by such other person, and the auditor becomes aware of such suspected offence involving fraud, he need not report the same to the Audit Committee under section 177 of the Companies Act 2013 or the Board of Directors.
Reporting on Suspected Offence Involving Fraud in case of Consolidated Financial Statements
The auditor of the parent company is not required to report on frauds under Section 143(12) if they are not being or have not been committed in the parent company by the officers or employees of the parent company but relate to frauds in:
a) A component that is an Indian company, since the auditor of that Indian company is required to report on suspected offence involving frauds under Section 143 (12) in respect of such company; and
b) A foreign corporate component or a component that is not a company since the component auditors’ of such components are not covered under Section 143(12).
The auditor of the parent company in India will be required to report on suspected offence involving frauds in the components of the parent company, if the suspected offence of fraud in the component is being or has been committed by employees or officers of the parent company and if such suspected offence involving fraud in the component is against the parent company, if:
a) the principal auditor identifies/detects such suspected offence involving fraud in the component “in the course of the performance of his duties as an auditor” of the consolidated financial statements; or
b) the principal auditor is directly informed of such a suspected offence involving fraud in the component by the component auditor and the management had not identified/is not aware of such suspected offence involving fraud in the component; or
c) a component that is not a company since the component auditors of such components are not covered under Section 143(12).
It may be noted that the proviso to Section 147(2) in the context of punishment to auditors for contravention with the provisions, inter alia, of Section 143 of the 2013 Act, states, “if an auditor has contravened such provisions knowingly or willfully with the intention to deceive the company or its shareholders or creditors or tax authorities, he shall be punishable with imprisonment for a term which may extend to one year and with fine which shall not be less than one lakh rupees but which may extend to twenty-five lakh rupees.
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