Ministry of Corporate Affairs plans to tighten audit reporting standards

MCA plans to propose changes to the Companies (Auditor’s Report) Order or CARO as soon as the next government assumes office.

The auditor would then have to do a test and justify why he reached a conclusion that the company continues to be a going concern.

New Delhi: India is set to strengthen audit reporting standards with the role of auditors coming under a cloud after a number of corporate frauds.

The ministry of corporate affairs plans to propose changes to the Companies (Auditor’s Report) Order or CARO as soon as the next government assumes office. “We will further strengthen the Companies (Auditor's Report) Order. We will make it even sharper,” a senior government official told ET.

The move comes at a time when questions have been raised on the role of auditors in several of the recent financial scams, particularly the loan repayment defaults of Infrastructure Leasing and Financial Services, which is being investigated by the Serious Fraud Investigations Office of the ministry of corporate affairs. The official said even the current standards were “good enough”, and auditors would not be allowed to use the fact of a revision of rules as an excuse for poor or negligent audit reporting under current standards. The auditing standards, which were last revised in 2016, dictate the disclosures that auditors must make when filing auditor’s reports.

CARO applies to most large companies in India other than financial and charitable institutions. The last revision of these rules added the requirement that managerial remunerations and related party transactions be included in the auditor’s report.

Experts say CARO has progressed along with international standards but could possibly benefit from the inclusion of more evaluations by auditors of the company’s status in the place of multiple smaller disclosures.

“CARO should include, whether the company in the view of the auditor is a going concern or not. Is there something in the accounts of the company which can impact its ability to be a going concern?” said Dinesh Kanabar, CEO of Dhruva Advisors.

The auditor would then have to do a test and justify why he reached a conclusion that the company continues to be a going concern, Kanabar added.

Kanabar also suggested that CARO could include an evaluation of the basis of the valuation of the assets of a company and remove items that do not impact a true and fair view of the books such as whether a company has paid statutory dues on time.

OPERATIONALISING NFRA

The ministry is also looking to operationalize the recently formed National Financial Reporting Authority. NFRA is set to take charge of oversight of audits of larger corporates including listed companies from the Institute of Chartered Accountants of India (ICAI).

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