The Institute of Chartered Accountants of India (ICAI) is to issue guidance about the implementation of the auditor’s duty to report on fraud to the authorities, in accordance with the recently enacted Companies Act 2013.
The new legislation, which has placed an unprecedented level of responsibility on India’s auditors, envisages these professionals "in the role of a whistleblower," according to the ICAI.
"This is for the first time that such responsibility of reporting on frauds directly to the central government has been given to the statutory auditors, in addition to their other existing reporting requirements to the shareholders." ICAI president K Raghu said.
Under section 143(12) of the Companies Act, auditors who suspect that fraud has been committed against the company subject to audit, have to report immediately to the central government.
"It is felt that this reporting requirement is quite demanding from the statutory auditors’ perspective," Raghu said.
He added that ICAI’s auditing and assurance standards board has already set up an expert group that will examine these fraud reporting provisions, identify practical implementation issues and develop guidance for the auditors on the requirements section 143(12) and related rules.
India’s Ministry of Corporate Affairs recently released rules encompassing procedures for compliance with such new requirements on reporting of fraud.
According to these rules, auditors who have sufficient reason to believe that an offence involving fraud is being or has been committed against the company by its officers or employees, they have to report to the authorities immediately but not later than 60 days when fraud comes to his knowledge.
Auditors are also required to forward this report to the company’s board or audit committee immediately and seek their reply or observations on the report within 45 days, before reporting to the central government.
Once auditors receive the feedback from the audit committee, they must forward it alongside the initial report to the central government within 15 days. The board or the audit committee should reply within 45 days, after that period auditors should forward the initial report the authorities.
ICAI observed that auditors are required to comply with the Standard on Auditing (SA) 240, Auditors Responsibilities relating to Frauds in An Audit of Financial Statements, issued by the institute
"However, section 143(12) is a new requirement to the extent that there was no similar provision in the Companies Act, 1956," ICAI said.
Satyam scandal outcome
ICAI’s remarks came on the back of its announcement to bar some of its members as a result of their role in the Satyam scandal.
Raghu said that three accountants – Srinivas Talluri, S Gopalakrishnan and V Srinivasu – are to be barred from practising as chartered accountants after they were found guilty of professional misconduct in relation to their work for Satyam by an ICAI disciplinary panel.
Talluri and Gopalakrishnan were partners of PwC India at the time, and Talluri was the signing partner and engagement leader of the audit team working on Satyam. Srinivasu was senior vice-president and director at Satyam.
Raghu added that another ICAI member who was also found guilty of misconduct, Prabhakar Gupta, had already been removed from the register.
The so-called Satyam scandal occurred in 2009, when the Indian IT giant Satyam Computer Services was found to have inflated its accounts by around $1.47bn. PwC was Satyam’s auditor at the time.
The scandal became international as, although Satyam’s shares traded primarily in India, the company also traded equity shares in the New York Stock Exchange.
In 2012 the US Securities and Exchange Commission criticised PwC for its role in the scandal, and fined it $6m.
Moving on from the scandal has proven difficult for the country’s profession and in 2011, the ICAI barred two accountants who worked for Calcutta-based Lovelock & Lewis on Satyam, an affiliate of PwC India from future audit work in the country.
(Additional reporting by Jonathan Minter)