Introduction to CARO

 Background

 

The Sub-sections (1-A) and (4-A) to Section 227 state certain matters which the auditor should look into and report on. It also provides the right to Central Government to give a general or special order which would specify certain matters to be stated in the auditor’s report. These clauses were inserted by the Companies (Amendment) Act, 1965 based on the recommendation of the Daphtary-Sastri Committee.

 

The Daphtary-Sastri  Committee recommended as follows:-

“The report of the Commission of Inquiry has demonstrated that the investing public has lost heavily by contributing the capital of the public companies into whose affairs the commission inquired. The following, among other methods, were adopted by person, directly or indirectly, in control of the affairs of the company, to cause loss to the investing public:

               I.      Loans and advances were made without security and at low interest or no interest to private companies controlled by such individuals or to the individuals themselves, to the detriment of the public company.  Sometimes, facility was provided for repayment in many instalments spread over a long period without interest.  These loans were shown as repaid but the commission discovered that no cash was received in repayment of these loans and that there was nothing more than a mere book adjustment.

             II.      Payments for purchases and sales were shown as made in cash although in reality only book entries had been made in the respective only book entries had been made in the respective accounts.

            III.      Manipulations were made in the purchase price or sale price of shares held by public companies in order fictitiously to create loss and the individuals in control of the concerns in which they were interested enjoyed the benefit.

 

The Companies Amendment Act 1965 sought to provide against the situation revealed in the Commission’s Report under which the investing public lost heavily by contributing to the capital of the companies which indulged in dubious practices not open to normal audit. It proposed to insert a new sub-section, namely, sub-section (4-A) in section 227 to enable the Government to issue suitable instructions to auditors. This provision is analogous to section 619 which empowers the Comptroller and Auditor- General to issue similar instructions to the auditors in respect of Government companies (Clause 22).

 

The Committee also felt that the Central Government should consult the Institute of Chartered Accounts of India before issuing an order, general or special in regard to the class or description of companies and other ancillary matters proposed to be specified therein unless the Government decides that such consultation is not necessary or expedient in the circumstances of the case.

 

The Clause was thereby amended accordingly.

 

Under the powers conferred by S. 227(4A), the Central Government first issued an order called the Manufacturing And Other Companies (Auditor’s report) order, 1975, (MAOCARO-1975). This order came into force from 1-1-1976 and applied to all companies engaged in manufacturing, service, trading and finance activities. There was in all 22 items on which auditor was required to give his specific report.

 

With changes in economic environment, the above order was replaced by another order called MAOCARO-1988 which came into force on 1-11-1988. This order contained 27 items on which auditor was required to make specific comments depending on the nature of activities of the company. The 1988 order replaced 1975 order after 13 years.

 

 After 15 years, the Central Government issued, in consultation with ICAI, a new order u/s.227(4A) called the Companies (Auditor’s Report) Order, 2003, super ceding the old Order, Manufacturing And Other Companies Auditor's Report Order 1988 ('MAOCARO'). This ‘CARO-2003’ has come into force from 1st July 2003. There are 33 items in CARO on which the auditor has to make specific comments. Some of the items in MAOCARO-1988 and CARO-2003 are common and some items from MAOCARO are omitted. Some clauses of the CARO were again amended through Notification G.S.R. 766(E) dated November 25, 2004 and the new Companies (Auditor's Report) (Amendment) Order, 2004 ('CARAO') came into force.

 

CARO seeks to rationalise the requirements under auditor’s statement .it focuses on the effectiveness of the internal control systems and procedures, effective end utilization of funds, reporting fraud on or by the company and such other matters.