Fraud reporting under Companies Act – a detailed analysis

Fraud reporting under Companies Act The new act has given a lot of responsibility on the auditor to report frauds to the board of directors and the government. It means that even for a small fraud in any large multi-location enterprise, the onus would be on the concerned chartered account, or cost and management accountant to report frauds. The provision has mandated an auditor/cost auditor/secretarial auditor, appointed by the company under section 139/148/204, to report frauds directly to the government, besides their existing responsibilities of reporting requirement to the shareholders or the company’s board of directors. Now youc an scroll down below n check more details regarding Fraud reporting under Companies Act

Fraud reporting under Companies Act

The new act has given a lot of responsibility on the auditor to report frauds to the board of directors and the government. It means that even for a small fraud in any large multi-location enterprise, the onus would be on the concerned chartered account, or cost and management accountant to report frauds

Section 143(12) to 143(15) of the Act contains provisions relating to reporting of fraud.

Section 143(12):

‘Notwithstanding anything contained in this section, if an auditor of a company, in the course of the performance of his duties as auditor, has 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 immediately report the matter to the central government within such time and in such manner as may be prescribed.’

Section 143(13):

‘No duty to which an auditor of a company may be subject to shall be regarded as having been contravened by reason of his reporting the matter referred to in sub-section (12) if it is done in good faith.

Section 143(14):

‘Provisions of this section shall mutatis mutandis apply to (a) the cost accountant in practice conducting cost audit under section 148; or (b) the company secretary in practice conducting secretarial audit under section 204.’

Section 143(15):

‘If any auditor, cost accountant or company secretary in practice do not comply with the provisions of sub-section (12), he shall be punishable with fine which shall not be less than 1 lakh but which may extend to 25 lakh.’

Similarly, Rule 13 of The Companies (Audit and Auditors) Rules, 2014 contains the operational procedure of reporting of fraud as prescribed in Section 143(12) of the Act.

Rule 13(1) says: “For the purpose of sub-section 12 of Section 143, 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 central government immediately but not later than 60 days of his knowledge and after following the procedure indicated herein below:

• (i) Auditor shall forward his report to the board or the audit committee, as the case may be, immediately after he comes to knowledge of the fraud, seeking their reply or observations within 45 days;
• (ii) On receipt of such reply or observations the auditor shall forward his report and the reply or observations of the board or the audit committee along with his comments (on such reply or observations of the board or the audit committee) to the central government within 15 days of receipt of such reply or observations;
• (iii) In case the auditor fails to get any reply or observations from the board or the audit committee within the stipulated period of 45 days, he shall forward his report to the central government along with a note containing the details of his report that was earlier forwarded to the board or the audit committee for which he failed to receive any reply or observations within the stipulated time.

Rule 13(2) further states that the report must be sent to the secretary, ministry of corporate affairs.

Rule 13(3) says: ‘The report shall be on the letter-head of the auditor containing postal address, e-mail address and contact number and be signed by the auditor with his seal and shall indicate his membership number.’

Rule 13(4) says that the report shall be in the form of a statement as specified in Form ADT-4.

It must be remembered that similar provisions of fraud reporting is applicable to the cost auditor as well. Rule 13(5) has clarified that the provision of this rule shall also apply, mutatis mutandis, to a cost auditor and a secretarial auditor while carrying out their duties under section 148 and 204 respectively

Conclusion

It should be clear by now that fraud covers the active concealment of a fact by one having knowledge or belief of the fact (the amount may be as small as 1,000) and it is the duty of the cost auditor to report such fraud, otherwise he/she will be held responsible. The cost auditor, who was mentioned at the beginning, was absolutely correct in highlighting the theft of raw materials in his report.

Relevant Parts of this article

• Corporate Frauds and Auditors Responsibility
• Punishment for fraud under Companies Act

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