Big audit firms have sought protection from civil and criminal liabilities in the wake of a new rule on reporting fraud in the Companies Act, 2013.
These firms said the notified rules under the Section 143 of the Act requires to be clarified as it defines ?fraud? somewhat different from an earlier discussion paper leading to ambiguity.
According to the Section 143 and the rules thereunder, an auditor has to report to the government ‘all’ frauds ? material and otherwise- in a company he has audited in 60 days of their discovery after taking up the matter with the audit committee or the Board of directors.
“The new rules may pose practical challenges for auditors as they require them to report all frauds to the Central government in absence of a clarification regarding materiality. Further, if subsequently it is concluded that there is no fraud, there is no provision available for the auditor to withdraw the reporting,” said Sai Venkateshwaran, partner and head-accounting advisory services at KPMG in India.
Price Waterhouse & Co also wants such reporting regimes to be accompanied by an appropriate legislation/regulation in order to protect the auditor from criminal or civil liability as is prevalent in the US and Europe. Harinderjit Singh, partner at Price Waterhouse & Co, said US SEC?s Order 10A or the OECD anti-bribery recommendations state that a requirement to report bribes should be accompanied by protection for the auditor.
“In a normal business, there can be allegations, which are at various stages of investigations. Consequently, the reporting requirement for an auditor should only be limited to those frauds, which have been investigated and concluded and not merely allegations,” Singh said.
However, according to Lalit Kumar, partner in law firm J Sagar Associates, the matter does not need any clarity because the deletion of ?likely to materially affect the company? (in the new rules) appears to be deliberate requiring auditors to now report all kinds of offences involving fraud if the auditor has sufficient reason to believe that fraud is being committed.
“In my view, if the auditor gets convinced with the reply and observation of the Board regarding any ongoing investigation against say an employee, he may drop reporting that fraud to the government. If, however, the auditor is not convinced, the obligation of the auditor is absolute to report fraud irrespective of the outcome of any internal company investigation,” Kumar said.
According to experts, the rules specifically require the auditor to report fraud on the letterhead of the auditor. “Use of letterhead is not allowed to use as per the “code of ethics” issued by the ICAI and certain disciplinary cases. Clarification is required with respect to this also, said Singh.
Another expert on company law matters pointed out that the relevant rules on reporting of fraud wants the auditor to state “yes” or “no” on whether the auditor is satisfied with the reply of the Board or audit committee.
“It may not be feasible for the auditor to comment on adequacy of the steps taken by the audit committee or Board in a yes/no response,” said the expert.
As per the rules, in case the auditor has sufficient reason to believe that an offence involving fraud is being or has been committed against the company by officers or employees of the company, he shall report the matter to the Centre immediately but not later than 60 days of his knowledge and after following the procedure.
As per the rules notified, the responsibility of reporting a fraud has also been imposed on a cost auditor and a secretarial auditor, apart from the chartered accountant, as part of his duties mentioned in the new law.