NFRA Circular on Statutory Auditors’ Responsibilities in relation to Fraud in a Company
National Financial Reporting Authority (NFRA), which is the regulator for auditors and audit firms for listed and large unlisted companies, has issued a circular stating that auditors need to report frauds and they will not be absolved of their responsibility in case they resign.
As per NFRA, it has noticed that auditors “are not fulfilling their statutory responsibilities relating to reporting of fraud” or suspected fraud to the government and the board or the audit committee as mandated under the Companies Act and other rules.
During its actions, NFRA has regulated three types of cases. In some cases, the auditor, based on the legal opinion submitted by the company, did not report the fraud, although it later turned out to be a case of fraud. Subsequently, the auditor relied on the legal opinion to defend itself.
In some other cases, it was found that the auditor did not report the fraud, and later argued that it was known to everyone. In a third set, the auditor resigned after detecting irregularities but did not report it. Now, NFRA has said that these actions are unacceptable.
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 statutory auditor shall initiate the steps prescribed under Rule 13 of Companies (Audit and Auditors) Rules 2014, which begins with reporting the matter to the board/ audit committee within two days of his/her knowledge of the fraud.
