The financial and corporate frauds in recent years in India have revitalized the thought on the need for high standards of corporate governance and arduous provision to handle fraud. This prompted to the introduction of stringent provisions in the new Companies Act 2013. The Companies Act 1956 too has provision relating to fraud it provides for punishments for fraud in various sections. There is a lot more in the new Act with respect to tackle the problem of fraud.
What is Fraud –For the purpose of Section 447,Fraud has been defined as, “Fraud in relation to affairs of a company or anybody corporate, includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss. ‘Wrongful gain’ means the gain by unlawful means of property to which the person gaining is not legally entitled and ‘wrongful loss’ means the loss by unlawful means of property to which the person losing is legally entitled.” It is the first time that the Act defines fraud and also imposes civil and criminal liability on the fraudster for non-compliance.
The definition of fraud as per SA 240 and the explanation of fraud as per Section 447 of the 2013 Act are similar, except that under Section 447, fraud includes ‘acts with an intent to injure the interests of the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss.’ However, an auditor may not be able to detect acts that have intent to injure the interests of the company or cause wrongful gain or wrongful loss, unless the financial effects of such acts are reflected in the books of account/financial statements of the company.
The Companies Act, 2013 had introduced Section 143(12) which requires the statutory auditors of companies to report to the Central Government about fraud/suspected fraud committed against the company by officers or employees of the company. This Section read with corresponding Rule 13 of the Companies (Audit and Auditors) Rules, 2014 require reporting of every fraud to the Central Government irrespective of amount of fraud.
The Companies (Audit and Auditors) Amendment Rules, 2015, issued by the Ministry of Corporate Affairs, on 14th December 2015, substituted Rule 13 of the Companies (Audit and Auditors) Rules, 2014. The new Rule 13 has introduced the thresholds for the purpose of reporting on frauds and differential reporting responsibilities of the statutory auditor with respect to the fraud/s above or below the notified threshold. The reporting requirement under Section 143(12) is for the statutory auditors of the company and also equally applies to the cost accountant in practice, conducting cost audit under Section 148 of the Act; and to the company secretary in practice, conducting secretarial audit under Section 204 of the Act.
The auditors, while carrying out an audit of financial statements, consider the fraud risk factors in terms of the Standard on Auditing (SA) 240, The Auditor’s Consideration of Fraud in an Audit of Financial Statements. The SA 240 is also clear as to the types of frauds that are relevant to the auditor in carrying
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out an audit of financial statements with the limited objective of expressing an opinion on their true and fair view. However, the auditor’s procedures prescribed under the SAs are aimed at meeting this objective only and do not envisage carrying out investigation/ forensic audit like procedures.
Effects of the substituted provision relating to Fraud reporting by Auditors:
The manner and the procedure which the auditor concerned needs to report to the Central Government is detailed in the Companies (Audit and Auditors) Amendment Rules, 2015.The report shall be sent to the Secretary, Ministry of Corporate Affairs in a sealed cover, 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 be signed by the auditor with his seal and shall indicate his Membership Number. The report shall be in the form of a statement as specified in Form ADT-4.
As per the new Rule 13, of the Companies (Audit and Auditors) Rules, 2014, as amended from time to time, if an auditor of a company, in the course of performance of his duties as statutory auditor, has reason to believe that an offence of fraud, which involves or is expected to involve individually an amount of rupees 1 crore or above, is being or has been committed against the company by its officers or employees, the auditor shall report the matter to the Central Government. Auditors are required to report fraud detected in the course of performance of their duties as auditor and the said Auditors must have reason to believe that the fraud or offence involving amounts prescribed in the provisions has been committed or is being committed.
For fraud less than rupees 1 Crore the auditor shall report the matter to Audit Committee constituted under section 177 or to the Board immediately but not later than two days of his knowledge of the fraud and he shall report the matter specifying the following:-
- Nature of Fraud with description;
- Approximate amount involved; and
- Parties involved
The following details of each of the fraud reported to the Audit Committee or the Board under sub-rule (3) of amended Rule 13 during the year shall be disclosed in the Board’s Report:-
- Nature of Fraud with description;
- Approximate Amount involved;
- Parties involved, if remedial action not taken; and
- Remedial action taken.
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The Form ADT – 4 contains details including:
?DateofAnnual General Meeting when the auditor was appointed or reappointed.
?Addressof office or location where the suspected offence is believed to have been or is being
committed.
?Fulldetails of the suspected offence involving fraud.
?Particulars of officers or employees who are suspected to be involved in the commission of the
offence.
?Basisonwhich fraud is suspected.
?Periodduring which the suspected fraud has occurred.
?Gistofreplies received
?Estimated amount involved in the suspected fraud.
?Detailsof steps, if any, taken by the company in this regard.
?Anyother relevant information.
Reporting timeline by the auditor
?Theauditor shall report to the Board or the Audit Committee, as the case may be, immediately but not later than two days of his knowledge of the fraud, seeking their reply or observations within forty-five days;
?Onreceipt of such reply or observations the auditor shall forward his report and the reply or observations of the Board or the Audit Committee along with his comments (on such reply or observations of the Board or the Audit Committee) to the Central Government within fifteen days from the date of receipt of such reply or observations;
?incasethe auditor fails to get any reply or observations from the Board or the Audit Committee within the stipulated period of forty-five days, he shall forward his report to the Central Government along with a note containing the details of his report that was earlier forwarded to the Board or the Audit Committee for which he has not received any reply or observations;
Reporting on Suspected Offence Involving Frauds noted in the course of providing such other attest or non-attest services
Section 143 deals with auditor’s duties and responsibilities under the Act with respect to financial statements prepared under the Act, the auditors perform other attest services in their capacity as auditors of the company. Should the auditor report under Section 143(12) on frauds noted in the course of providing such other attest or non-attest services?
If an offence of fraud in the company by its officers or employees that is identified/noted by the auditor in the course of providing such attest or non-attest services as referred above, is of such amount/s as specified in Rule 13 of the Companies (Audit and Auditors) Rules, 2014 {as amended by the Companies (Audit and Auditors) Amendment Rules, 2015} which the auditor uses or intends to use the information that is obtained in the course of performing such attest or non-attest services when performing the audit under the 2013 Act, then in such cases, the matter may become reportable under Section 143(12), read with the Rules thereunder, as specified in the Guidance Note on Internal Financial Controls issued by ICAI.
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Can the Auditor apply the Concept of Materiality for Reporting on Fraud?
The auditor should continue to apply the concept of materiality in performing the audit in accordance with SA 320 “Materiality in Planning and Performing an Audit”. Section 143(9) requires the auditor to comply with the SAs, which, inter alia, includes consideration of materiality, applying materiality in evaluating misstatements and disposition of the same. The concept of materiality is fundamental for setting up an appropriate system of internal control, preparation of financial statements and its audit.
Should the Auditor Report under Section 143(12) in case of Corruption, Bribery, Money Laundering and Non-compliance with other Laws and Regulations?
The auditor should comply with the relevant SAs with regard to illegal acts (e.g. SA 240 and SA 250, “Consideration of Laws and Regulations in an Audit of Financial Statements”) when performing the audit.
If the auditor, in the course of performance of his/her duties as the auditor, comes across instances of corruption, bribery and money laundering and other intentional non-compliances with laws and regulations, the auditor would need to evaluate the impact of the same in accordance with SA 250 to determine whether the same would have a material effect on the financial statements.
Whether the cases of fraud is only restricted to provisions as mentioned in the new Act?
There are around 17 provisions spread all across the new Act wherein the punishment provided is as in Section 447. But that doesn’t mean that only those cases would be considered as “fraud” and punished as “fraud”Undoubtedly those would be punished as fraud but other cases which fall within the meaning of the definition of fraud under section 447 will also attract punishment as provided in Section 447.
The following table includes sections which attracts liability U/s 447. Person accused of any such offence under these sections shall not be released on bail or bond, unless subject to the exceptions provided u/s 212(6) of the act.
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7 (5) |
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Registration of a Company – submission of |
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false or incorrect information at the time of |
suppressing any material information of |
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filing documents for incorporation. |
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7(6) |
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If proved at a later stage that the company |
the promoters, the persons named as the |
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was got incorporated by furnishing any |
first directors of the company, and the |
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false or incorrect information or |
persons making the declarations other |
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representation or by suppressing any |
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material fact or information in any of the |
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documents or declaration filed or made |
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for incorporating such company, or by any |
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fraudulent action. |
of the company. |
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8(11) |
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Section – 8 Company. If proved that the |
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affairs of the company were conducted |
default [Sec. 2 (60)], |
shall be liable for |
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fraudulently. |
fraud. |
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34 |
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Mistatement in prospectus |
every person who authorises the issue of |
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such prospectus shall be liable. |
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36 |
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Fraudulently Inducing person to invest |
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promise, forecast shall be liable. |
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38(1) |
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Personation for acquisition, etc., of |
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securities: |
abetting to make such applications shall |
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be liable. |
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46 (5) |
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issue of a duplicate certificate of shares, |
Company liable with fine which shall not |
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by a Company with an intent to defraud |
be less than 5 times the face value of the |
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shares involved in the issue of the |
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duplicate certificate but which may |
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extend to 10 times the face value of such |
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shares or Rs. 10 Crores whichever is |
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higher |
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Every Officer of the Company who is in |
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default [Sec. 2 (60)], |
shall be liable for |
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fraud. |
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56 (7) |
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Transfer and Transmission of Shares: |
Such Depository |
or Depository |
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where any depository or depository |
Participant shall be liable for fraud |
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participant, with an intention to defraud a |
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person, has transferred shares. |
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66(10) – |
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Knowingly concealing the name of a |
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thereof or any interest thereon, and if |
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any fraudulent purpose |
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directly or indirectly, acted in a fraudulent |
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manner or abetted or colluded in any |
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fraud by, or in relation to, the company or |
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its directors or officers, and the NCLT has |
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passed an order against them. |
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Conducting business of a company for a |
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fraudulent or unlawful purpose |
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213 |
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Investigation in to Company’s affairs, and |
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if after investigation, it is proved that: |
default [Sec. 2 (60)], and the person or |
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(i) |
Business of |
a Company |
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conducted |
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intent to |
affairs shall be punishable. |
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defraud its creditors |
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(ii) |
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misconduct |
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or any |
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229 |
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Furnishing false statement, false entry in |
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any document, or destruction of |
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inspection, inquiry or investigation |
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251 (1)- |
Fraudulent Application |
for removal |
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Section not |
name from |
register with the object of |
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and severally liable to any person or |
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Power of Tribunal to Assess Damages |
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Section not |
Against Delinquent Directors, officers and |
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yet Notified |
employees in the course of the scrutiny or |
officer or employee of the sick company |
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implementation of any scheme or |
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proposal of rehabilitation |
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appropriation or guilty of any misfeasance |
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shall be liable for Fraud. |
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339(3)- |
Conducting business |
of company with |
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Section not |
intent to defraud its creditors, any other |
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yet Notified. |
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Section 447. |
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Further, the Tribunal, on the application |
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of the Official Liquidator, or the Company |
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Liquidator or any creditor or contributory |
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so to do, declare that any person, who is |
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or has been a director, manager, or officer |
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of the company or any persons who were |
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knowingly parties to the carrying on of the |
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business in the manner aforesaid shall be |
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personally responsible, without any |
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limitation of liability, for all or any of the |
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debts or other liabilities of the company. |
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448 |
Making a false statement or omits any |
Every person who has made the false |
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material fact knowing it to be material, in |
statement or omits any material fact shall |
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any return, report, certificate, financial |
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statement, |
prospectus, |
statement |
or |
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other document required by or for the |
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purpose of any of the |
provisions of this |
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act or the rules made thereunder |
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Reporting of Fraud Under Companies Act, 2013 |
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Penalties for “Fraud” – Section 447 & 451 |
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Section |
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Sec 447 |
Every Person |
Fine |
Min: 100% |
Max: 300% |
|
|
|
involving in |
|
|
|
|
|
|
Imprisonment |
Min: 6 Months |
Max: 10 years |
||
|
|
fraud |
||||
|
|
|
|
|
|
|
|
|
Company |
Fine |
200% of Fine |
|
|
|
Sec 451 |
|
|
|
|
|
|
Every officer |
Fine |
200% of Fine |
|
|
|
|
|
|
|
|||
|
|
in default |
|
|
|
|
|
|
|
Imprisonment |
As per respective section |
||
|
|
|
|
|
|
|
Conclusion:
The introduction of new stringent provisions under the new Companies Act will be tested if any corporate fraud and scams are disclosed now in corporate India. Again, as with the reporting on Internal Financial Controls, the requirement to report frauds to Central Government, has given rise to many a issues in the minds of both the auditors as well as companies which need to be addressed so that the auditors can properly understand and implement the requirements of section 143(12) of the Companies Act, 2013
