NFRA releases circular on Auditors responsibilities in relation to Fraud: Non-reporting CA to face serious outcome

National Financial Reporting Authority (NFRA) has noticed that Chartered Accountant’s (CA) Statutory Auditors are not fulfilling their statutory responsibilities relating to reporting fraud as mandated under the Companies Act, 2013 (CA 2013) read with the relevant Rules and the applicable Standards on Auditing (SAs).

It was further quoted that CA 2013, the Companies (Auditor’s Report) Order (CARO), and the Standards on Auditing (SAs) place mandatory reporting obligations on auditors to report fraud and/or suspected fraud to the Central Government and the Board/Audit Committee.

Section 143 (12) of CA 2013 read with Rule 13 of the Companies (Audit and Auditors) Rules 2014 places certain reporting obligations on the auditor, in relation to fraud. Clause (xi) of Companies (Auditor’s Report) Order, 20201 also requires auditors to make statements relating to reporting of fraud in his/her report.

In accordance with Section 140(5) of the CA 2013, auditors may face repercussions if they assisted or cooperated in any fraud committed by, or in connection with, the firm, its directors, or officials. In addition to removal and debarment for a five-year period, the auditor is also subject to actions under Section 447 of CA 2013 under the provisions of the section.

Some auditors have the misunderstanding that quitting an audit engagement relieves them of their reporting responsibilities for fraud and the penalties under CA 2013 for nonreporting of fraud. In this regard, the Hon’ble Supreme Court of India recently ruled in the case of Union of India and Another v. Deloitte Haskins and Sells LLP & Anr CRIMINAL APPEAL NOS.2305-2307 OF 2022 that auditors who leave their audit engagements without disclosing fraud or suspected fraud will also be subject to the consequences of section 140 (5) of CA 2013.

“7…. Therefore, on true interpretation, even on resignation by an auditor of a company even during the enquiry/proceedings under section 140(5) or even prior to that, there shall not be any termination of the proceedings under section 140(5) as observed and held by the High Court. At the cost of repetition, it is observed that in a given case, an auditor, who in fact has, directly or indirectly, acted in a fraudulent manner, to avoid any further consequence under the second proviso to section 140(5), resigns to avoid any consequence under the second proviso to section 140(5), it cannot be permitted. 14…Acting in a fraudulent manner, directly or indirectly, by an auditor is a very serious misconduct and therefore the necessary consequence of indulging into such fraudulent act shall follow.”

Statutory Auditors are required by law to report fraud or suspected fraud if they notice questionable behaviours, transactions, or business practises that give rise to suspicions that the company’s officers or workers are committing or have already committed fraud against it. In this situation, the Statutory Auditor must take the actions outlined in Rule 13 of the Companies (Audit and Auditors) Rules 2014, starting with notifying the board or audit committee as soon as they become aware of the fraud within TWO days.

Even in situations where the Statutory Auditor is not the first to notice the fraud or suspected fraud, the Statutory Auditor is required to submit Form ADT-4 to the Central Government pursuant to Section 143 (12).

The Auditor’s obligation to disclose actual or suspected fraud as required by law is not discharged by resignation.

When assessing fraud, the Statutory Auditor must use his or her own professional scepticism and is not required to be swayed by any legal advice given by the Company or its Management.

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