MCA notifies Companies (Auditor’s Report) Order 2020 – CARO 2020.

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The government had issued new norms for auditors, seeking more disclosures in reports, a move which comes after a series of corporate scams and frauds surfaced over the past few years.

CARO 2020 – Companies (Auditor’s Report) Order, 2020

MCA in place of existing the Companies (Auditor’s Report) Order, 2016, has notified CARO 2020 after consultation with the National Financial Reporting Authority constituted under section 132 of the Companies Act, 2013.

Auditor’s report to contain matters specified in paragraphs 3 and 4. – Every report made by the auditor under section 143 of the Companies Act on the accounts of every company audited by him, to which this Order applies, for the financial years commencing on or after the 1st April, 2019, shall in addition, contain the matters specified in paragraphs 3 and 4, of the CARO 2020.

Provided this Order shall not apply to the auditor’s report on consolidated financial statements except clause (xxi) of paragraph 3.

It shall come into force on the date of its publication in the Official Gazette.

CARO 2020 – Key changes/highlights

Matters to be included in auditor’s report, in CARO 2020 – the reporting clauses are more extensive and detailed than were in CARO2016

Unlike CARO 2016, which required reporting on all fixed assets, new reporting requirements pays attention to Property, Plant, Equipment and intangible assets.

Reporting on revaluation of Property, Plant and Equipments by company

Reporting of proceedings under the Benami Transactions (Prohibition) Act, 1988.

Reporting of compliances if company was sanctioned working capital limits in excess of Rs.5 crores or more from banks or financial institutions.

 – whether the quarterly returns or statements filed by the company with such banks or financial institutions are in agreement with the books of account of the Company, if not, to give details;

Reporting of investments in or in providing of any guarantee or security or granting any loans or advances to companies, firms, Limited Liability Partnerships or any other parties.

Reporting of compliances with RBI directives and the provisions the Companies Act with respect to deemed deposits.

Reporting with respect to transactions not recorded in the books of account surrendered or disclosed as income in the income tax proceedings.

Comprehensive reporting requirement for default in the repayment of loans / other borrowings or in the payment of interest

 – whether the company is a declared wilful defaulter by any bank or  financial institution or other lender; 

 – whether term loans were applied for the purpose for which the loans were obtained; if not, the amount of loan so diverted and the purpose for which it is used may be reported; 

 – whether funds raised on short term basis have been utilised for long term purposes,  if yes, the nature and amount to be indicated

Reporting on treatment by auditor of whistle-blower complaints received during the year by the company 

Reporting on internal audit system

 – whether the company has an internal audit system commensurate with the size and nature of its business; 

 – whether the reports of the Internal Auditors for the period under audit were considered by the statutory auditor;   

Reporting on cash losses

Reporting on resignation of the statutory auditors

Reporting on uncertainty of company capable of meeting its liabilities

Reporting transfer of unspent CSR amount to Fund specified in Schedule VII

Reporting on qualifications or adverse remarks by the auditors in the CARO reports of companies included in the consolidated financial statements

It is expected that CARO, 2020 will improve the overall quality of reporting by the auditors and thereby lead to “greater transparency and faith in the financial affairs of the companies.”

Read : CARO 2020 dated 25.02.2020

Rotation of auditors and its side effects

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The Companies Act, 2013, has introduced important audit reforms. One of the important reforms is rotation of the auditor.

Important provisions under this reform

  • All listed companies; unlisted public limited companies having paid-up share capital of Rs 10 crore or more; all private limited companies having paid-up share capital of Rs 20 crore or more, and all companies having public borrowings from financial institutions, banks or public deposit of Rs 50 crore or more are required to rotate their auditor.
  • An individual cannot continue as an auditor for more than one term of five years and an audit firm cannot continue as an auditor for more than two terms of five years
  • The cooling off period is five years.
  • The provision must be complied by April 1, 2017.

Benefits of this reform

  • This is expected to improve audit quality, resulting in improved financial reporting.
  • Would give local auditors more leverage, if implemented properly along with some other measures.

Local auditors v/s the Big Four

  • Local firms dominate the Indian audit market. However, the presence of the Big Four audit firms (Deloitte, PWC, E&Y and KPMG) cannot be ignored.
  • The Big Four are the largest professional service network in the world. They provide audit, assurance, tax, consulting, advisory, actuarial, corporate finance and advisory services. In India, they cannot provide audit services directly.
    • It is alleged that they flout rules while providing audit and assurance services. Many foreign investors put a condition that the auditor of their choice should be appointed. This helps the Big Four audit firms to grow in India.
    • There is an apprehension that many companies that get their accounts audited by local firms will appoint one of the Big Four or another large international professional service network as auditors.
    • Hence, the Ministry of Corporate Affairs had notified the constitution of a three-member expert group to look into the complaint that the Big Four are circumventing rules and to find ways to help local firms.

Should the government intervene?

  • Local auditors are mostly present in tier 2 and tier 3 cities and audit 62 % of the companies listed on BSE 500.
  • They provide a variety of services to small companies. They lack aspiration to become big.
  • Therefore, it is debatable whether there is a case for government’s intervention to protect local audit firms

Way ahead and Conclusion

Chartered accountants are prohibited from soliciting professional work through advertisement or otherwise. But they can respond to tenders.

  • The practice of issuing a tender for the appointment of internal auditors is quite common among public enterprises. Such a practice is not common among private-sector companies.
  • Tendering is the right method to search for the right audit firm. This increases choice and reduces auditing cost through competition.
  • Companies should not limit their choice to the Big Four and other international firms or a few large local audit firms.
  • There are local firms that have capabilities to audit large and complex transactions. Search through tendering process would help to identify such firms.

It will be interesting to see how the new rules regarding rotation of auditors will actually impact the auditing profession.

 

Source: http://www.business-standard.com/article/opinion/rotation-of-auditors-and-its-side-effects-116100900736_1.html

Bank of Baroda scam: RBI tells banks to conduct internal audit

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All public sector and private banks have been asked by the Reserve Bank of India to conduct a “thorough internal audit” and put the report before their respective audit committees, as part of the central bank’s efforts to check fraudulent foreign exchange transactions. The move comes in the wake of irregularities that came to light last year in Rs 6,100-crore import remittances effected by Bank of Baroda’s Ashok Vihar branch in New Delhi.

A circular has been issued to all scheduled commercial banks, advising them to conduct a thorough internal audit and place the report before audit committee of the board of the respective banks and to forward the summary of findings to RBI, the central bank said in reply to an RTI query filed by PTI. The RBI was asked to provide details of action being taken by it to check fraudulent forex transactions by banks. “We are in the process of receiving the internal audit report from various banks,”it said.

The RBI has asked Bank of Baroda to conduct a bank-wide review of the outward remittances to rule out similar wrong doings at other domestic branches and submit a report thereof to it. The bank has since completed the internal audit and placed the report before its audit committee for directions. The Bank of Baroda has also selected a consultant to review its Know Your Customer (KYC), Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) policy and practices, to set up robust systems, the central bank said.

“They have also framed a policy for advance import remittance which covers system check points like cooling period of six months in respect of newly opened account, multiple transactions in a day for $100,000 and below, etc,” the RBI said.

Both the Central Bureau of Investigation and Enforcement Directorate (ED) are probing remittances of Rs 6,100 crore to Hong Kong from the Bank of Baroda’s Ashok Vihar branch.

The huge transaction is believed to be trade-based money laundering as the amount was transferred in the garb of payments for imports that never took place, investigators say.

Source: http://www.business-standard.com/article/pti-stories/bob-forex-scam-rbi-tells-all-banks-to-conduct-internal-audit-116013100149_1.html