Fraud reporti g

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CA. Sukhdev Singh (Querist)
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03 June 2015 in a builder pvt ltd co. an investor who booked a flat filed an Fir against directors for for cheating and misappropriation of its money. directors were arrested. police filed charge-sheet. directors got bail. magistrate took cognizance of the case. and the case is under trial. what are the responsibilities of the auditor to report such event. whether it is a fraud by company under companies act and Caro.

CA. Sukhdev Singh

CA. Sukhdev Singh (Querist)
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16 June 2015 Any expert. Please reply.

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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25 July 2024 In the scenario described, where directors of a private limited company (a builder) are accused of cheating and misappropriation of an investor's money, there are several aspects to consider regarding the responsibilities of the auditor under the Companies Act and CARO (Companies Auditor's Report Order):

1. **Auditor's Responsibilities under Companies Act:**
- **Reporting of Fraud:** Section 143(12) of the Companies Act, 2013 mandates that if during the course of the audit, the auditor has reason to believe that an offence involving fraud is being or has been committed against the company by officers or employees, they must immediately report the matter to the central government within specified timelines.
- **Nature of Fraud:** The allegations of cheating and misappropriation of investor funds, if substantiated, could constitute fraud under the Companies Act. Fraud is broadly defined and includes any act, omission, concealment of any fact, or abuse of position, committed by any person with intent to deceive, to gain undue advantage from, or to injure the interests of the company or its shareholders or creditors.

2. **CARO (Companies Auditor's Report Order):**
- CARO requires the auditor to report on various matters in their audit report, including instances of fraud as defined under Section 143(12) of the Companies Act. If the auditor comes across any fraud during the audit, they must include this in their report to the shareholders of the company.

3. **Procedure for Reporting:**
- **Immediate Reporting:** As per Section 143(12), the auditor must report to the central government (Ministry of Corporate Affairs) within 60 days of their knowledge of the fraud.
- **Audit Report:** The auditor's report should include details of the fraud identified, its nature, approximate amount involved, and any other relevant information.
- **Communication:** The auditor should communicate directly with the board of directors or the audit committee about the findings and the need for reporting the fraud.

4. **Impact on Company and Stakeholders:**
- The ongoing trial and charges against the directors have significant implications for the company, its reputation, and its stakeholders, including investors and creditors.
- Auditors have a crucial role in ensuring transparency and accountability by promptly reporting such incidents of fraud to appropriate authorities, thereby protecting the interests of shareholders and other stakeholders.

In conclusion, in the context of the builder private limited company facing allegations of fraud by its directors, the auditor has a legal obligation under the Companies Act and CARO to report any identified fraud to the central government. This reporting ensures regulatory compliance and helps in maintaining transparency and trust in corporate governance practices.

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