Resignation does not absolve Auditor of onus of reporting fraud: NFRA

The NFRA in a circular has said that it has noticed that auditors are not fulfilling their statutory responsibilities relating to reporting of fraud as required by the Companies Law

The National Financial Reporting Authority (NFRA) has said that resignation does not absolve the auditor of his responsibility to report suspected fraud or fraud as mandated by law. The NFRA in a circular dated June 26 has said that it has noticed that auditors are not fulfilling their statutory responsibilities relating to reporting of fraud as required by the Companies Law.

NFRA said that statutory auditors are under a mandatory obligation to report fraud or suspected fraud if they observe suspicious activities, transactions or operating circumstances in a company that indicate reasons to believe that an offence of fraud is being or has been committed against the company by its officers or employees.

“The Statutory Auditor is duty bound to submit Form ADT-4 to the Central Government u/s 143 (12) even in cases where the Statutory Auditor is not the first person to identify the fraud/suspected fraud,” NFRA said in its circular.

The financial reporting authority also cited a Supreme Court order to stress its point, “It is observed that in a given case, an auditor, who in fact has, directly or indirectly, acted in a fraudulent manner, to avoid any further consequence under the second proviso to section 140(5), resigns to avoid any consequence under the second proviso to section 140(5), it cannot be permitted.”

The Companies Auditor’s Report Order also called CARO 2013 also states that if the auditor has reason to believe that an offence of fraud, which involves or is expected to involve individually an amount of rupees one crore or above, is being or has been committed against the company by its officers or employees. The auditor is required to report the matter to the Board or Audit Committee and to the Central Government in the form of a statement.