Fraud Reporting of Companies

In this global era, corporate fraud has always been a major problem to be addressed to. Though there are various punishments for its commission, stringent reporting mechanism was required for corporate frauds. Unlike Companies act, 1956, Companies act, 2013 have provided a separate and clear mechanism for reporting of fraud committed in the company by its officers and employees. These provisions are discussed herewith –

Meaning of fraud

As per the provisions of the act, Statutory auditor is under a duty to report fraud which comes to his knowledge during performance of his duties. The detailed mechanism is discussed in detail in below paragraphs.As per act means fraud in relation to company means – if any officer omitting, concealing any facts or abusing his position to deceive the interest of the company, shareholder or creditors or gaining undue advantage irrespective of whether there is wrongful gain or loss ( Illegal or not).In simple words any act harming shareholder or company’s interest and due to which the person committing is gaining undue advantage in fraud.

A similar definition is also provided in standards on auditing practices.

It is worth noting that reporting requirement of companies act deals with employee and officer’s fraud and not management fraud, moreover these provisions are equally applicable to cost auditor and secretarial auditor (whether in practice or not).

Procedure of reporting of fraud

Law makers have provided a separate reporting mechanism for fraud amounting to Rs.1 crore and above and for the frauds which are lesser than the said amount.

These procedures are discussed below

Fraud involving Rs.1 crore or above

• Auditor shall communicate fraud to the board/Audit committee[1], within 2 days of his knowledge of fraud seeking reply thereof within 45 days.
• If reply is received within 45 days

Auditor shall forward the following documents to CG within 15 days of receipt of reply

• His own report on fraud
• Reply/observations received from the audit committee/board
• His own comments on reply and observation
• In reply is not received within 45 days

Then the auditor shall send the below mentioned documents to CG

• His own report on fraud
• Note containing details of his report which was sent to the board/Audit committee for which reply was not received.

Manner of reporting fraud to Central Government

Addressee: To The Secretary, Ministry of Corporate Affairs

Mode: In a sealed cover by Registered Post with Acknowledgement Due or by Speed Post followed by an e-mail in confirmation of the same;

Format of the report: the report shall be on the letter-head of the auditor containing

• postal address,
• e-mail address and
• contact telephone number or mobile number and
• signature and seal of the auditor indicating his Membership Number; and
• eForm ADT-4.

Fraud involving amount less than Rs.1 crore

In case of a fraud involving amount less than 1 crore the auditor shall report the matter to Audit Committee or to the Board immediately but not later than 2 days of his knowledge of the fraud along with following details –

1. Nature of Fraud with description;
2. Approximate amount involved; and
3. Parties involved.

Disclosure in Boards Report 

It is duty of the management to disclose details of fraud in the company’s board’s report reported to it by auditor enumerating the following details

1. Nature of Fraud with description;
2. Approximate Amount involved;
3. Parties involved, if remedial action not taken; and
4. Remedial actions taken.

Reporting requirement in CARO,2016[2]

It is duty of every auditor to report in his annexure to the auditor’s report (CARO, 2016) the following details –

• Whether any fraud is committed by employee or company?,
• if yes, the nature and amount involved in it.

Conclusion

As per 143(12) of companies act, if fraud involves more than 1 crore it has to be reported to CG and if the amount is lesser, then it should be disclosed in boards report. As per CARO, 2016 auditor shall report on whether there was any commission of fraud, if so then nature and amount should be disclosed.

[1] Committee constituted U/s 177 of companies act, 2013

[2] Not applicable to private companies where

Paid up share capital is not more than Rs. 1 crore

Total borrowings from banks and financial institution is not more than Rs. 1 crore( at any point during FY)

Total revenue as per schedule III is not more than Rs. 10 crore.