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Techniques of fraud reporting By auditors

CS SIDDHARTHA BANIK 
on 08 January 2016

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Companies Act, 2013 has introduced provisions for detecting fraud at the grassroots level by forcing accountability to the Auditors of the Company. Accordingly Central Government notifies the Companies (Audit and Auditors) Amendment Rules, 2015  by amending the Companies (Audit and Auditors) Rules, 2014;

It is pertinent to note here that ‘Auditors’ here means Statutory Auditors, Secretarial Auditors and Cost auditors.

The Act or the Rule has not defined the term ‘Fraud’. In common parlance, it means a wrongful or criminal deception intended to result in financial or personal gain or Loss.

Also the Rules are applicable for actual fraud that are already happened, as well as for anticipated fraud.

According to the Companies (Audit and Auditors) Amendment Rules, 2015 Auditors of a Company are duty bound to report the fraud to the appropriate authority.

Types of Fraud:

For Auditors reporting purposes ‘fraud’ may be categorized as below:

1. Fraud, which involves or is expected to involve individually an amount of rupees one crore or above, and

2. Fraud, which involves or is expected to involve individually an amount of rupees Less than one crore;

Eligibility for Reporting:

As per the Rule, the fraud must be committed against the Company by any Officer or Employee of the Company;

(A) Reporting of Fraud, which involves or is expected to involve individually an amount of rupees one crore or above:

1. Initial Reporting to the Board or Audit Committee, as the case may be:

a. Fraud, which involve individually an amount of rupees one crore or above, the Auditors, at the initial stage, should report the Fraud or anticipated Fraud to the Board or the Audit Committee, as the case may be;

b. Time period of initial reporting is Two Days of his knowledge and should seek their  reply or observations within forty-five days of reporting;

2.   Final Reporting to the Central Government:

a. Within fifteen days from the date of receipt of such reply or observation of the Board or the Audit Committee, as the case may be, the auditors shall forward his report and the reply or observations of the Board/Audit Committee, along with his comments (on such reply or observations of the Board or the Audit Committee), to the Central Government ;

b. in case the auditor fails to get any reply or observations from the Board or the Audit Committee within the stipulated period of forty-five days, he shall forward his report to the Central Government along with a note containing the his report that was earlier forwarded to the Board or the Audit Committee for which he has not received any reply or observation;

Manner of Sending Report to the Central Government:

1) The Report should be addressed to The Secretary, Ministry of corporate Affairs ;

2)The report shall be prepared on the letter-head of the auditor, which contain postal address, email address and contact telephone number or mobile number and be signed by the auditor with his seal and shall indicate his Membership Number; and

3) It should be sent by putting in a sealed cover and by Registered Post with Acknowledgement Due or by Speed Post;

4) Immediately thereafter an e-mail confirmation should also be forwarded to the Secretary, MCA;

(B) Fraud Reporting, which involves or is expected to involve individually an amount of rupees Less than one crore

In case of a fraud involving lesser than the amount specified in sub-rule (1)(i.e., involve individually an amount of less than rupees one crore), the auditor shall report the matter to Audit Committee constituted under section 177 or to the Board immediately but not later than two days of his knowledge of the fraud by specifying the following:-

(a) Nature of Fraud with description;
(b) Approximate amount involved: and
(c) Parties involved.

Additional Responsibilities of the Board

The following details of each of the fraud reported to the Audit Committee or the Board under sub-rule (3) during the year shall be disclosed in the Board’s Report:-

(a) Nature of Fraud with description;
(b) Approximate Amount involved;
(c) Parties involved, if remedial action not taken: and
(d) Remedial actions taken;

Name of Author: CS Siddhartha Banik
(Company Secretary)
email: pj_law_solution@yahoo.in


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