Tighter norms for auditors to help detect fraud in firms
NEW DELHI: Auditors in India will now be required to record their findings related to potential frauds in companies, their ability to service debt and whistleblower complaints after the government widened the scope of statutory audits amid a surge in fraud cases.
The Companies (Auditor’s Report) Order, 2020, notified on Wednesday by the corporate affairs ministry, mandates enhanced disclosures by auditors and is aimed at detecting frauds in companies before it is too late.
Auditors will now have to weigh in on whistle-blower complaints received by the company as well as concerns raised by outgoing auditors before forming their opinion.
The order also requires auditors to file their views on whether “material uncertainty exists as on the date of the audit report (and) that the company is capable of meeting its liabilities existing at the date of balance sheet as and when they fall due within a period of one year from the balance sheet date.”
Auditors will also have to report if term loans were used for the purpose they were taken. The order is applicable to all companies other than stand-alone private companies with sales less than ₹10 crore, banks, insurers, not-for-profit and one-person companies.
With the changes, auditors are now required to comment on 50 matters as against 21 matters in the 2016 version of the order, said Sanjeev Singhal, partner, SR Batliboi and Co. Llp, a network firm of EY. “Wider reporting on frauds and whistle-blower complaints, reporting on proceedings initiated or pending for holding any benami property, evaluating reasons for resignation by outgoing auditor, revaluation of property, plant and equipment (PPE)/ intangible assets may pose a significant challenge both for the companies as well as the auditors,” said Singhal.
The move to widen the scope of audit reports comes in the context of frauds at companies such as Infrastructure Leasing and Financial Services Ltd (IL&FS) and Dewan Housing Finance Corp. Ltd.
The fraud at IL&FS triggered a liquidity squeeze among nonbank lenders. The government superseded the lender’s board in 2018 after it defaulted on series of payments.
An official statement said the changes are expected to significantly improve the overall quality of reporting by the auditors, leading to greater transparency and faith in the financial affairs of the companies. The statement also said it will aid in attracting investments by and in Indian companies.
AUDITORS WILL WEIGH IN ON WHISTLE-BLOWER COMPLAINTS RECEIVED BY THE FIRM AND ISSUES RAISED BY OUTGOING AUDITORS BEFORE FORMING OPINION