To check frauds, govt tightens reporting norms for auditors

To check corporate wrongdoings, the government today made it mandatory for auditors to flag off any lapses found on the company's part, including those related to frauds, inventory and asset management, outstanding dues and compliance to statutory regulations.
The order comes against the backdrop of enhanced efforts by the government and regulators to strengthen overall corporate governance standards and to prevent instances of financial and accounting frauds.
Issuing a detailed set of directions to be followed by auditors, the Corporate Affairs Ministry said that various aspects about the functioning and management of a company should be mentioned by them in their audit reports.

Auditors would now have to mention about internal control systems, records of fixed assets, undisputed statutory dues, and default in repayment of loans, among other factors related to a corporate whose books they audit.
The Ministry said an auditor should mention whether there is "an adequate internal control system commensurate with the size of the company and the nature of its business, for the purchase of inventory and fixed assets and for the sale of goods and services".
In addition, any continuing failure to correct major weaknesses in internal control system should be flagged off.

With regard to outstanding statutory dues, the Ministry said auditors have to mention about the same in their reports. This would be applicable on dues related to provident fund, employees' state insurance, income, sales, wealth and service taxes, customs and excise duties, among others.

"... The extent of the arrears of outstanding statutory dues as at the last day of the financial year concerned for a period of more than six months from the date they became payable, shall be indicated by the auditor," it said.
Tax disputes should also be mentioned by the auditors.
Besides, the auditor is required to report whether a firm is maintaining proper records, including quantitative details and situation of fixed assets.
The auditor has to mention whether the company's management physically verifies fixed assets at reasonable intervals and about any material discrepancies. Also, it has to be mentioned whether lapses have been properly dealt with in the books of account.

The directions have been issued through the Companies (Auditor's Report) Order, 2015, and would have to be followed for the financial year that started on or after April 1, 2014.
The order would be applicable on audits of banking, insurance, foreign and one-person companies. It would also be applicable on certain private companies, which among other criteria, whose turnover is not more than Rs 5 crore at any point of time during the financial year.
Auditors are now required to report "any fraud on or by the company" along with its nature and amount involved.
When lapses are noticed, they would have to state the reasons for such unfavourable or qualified matter.

Where the auditor is unable to express any opinion in answer to a particular question, the report "shall indicate such fact together with the reasons why it is not possible for him (auditor) to give an answer to such question", the Ministry said.