The Auditor's Duties and Responsibilities in the Case of Fraud
Chapter Ten
Syllabus topic 2, "Errors & Frauds – Definitions, Reasons and Circumstances, Types of Error, Types of frauds, Risk of fraud and Error in Audit, Auditors Duties and Responsibilities in case of fraud."
Pages 25 to 27 of 98
In one line
Where an auditor has reason to believe an offence of fraud is being or has been committed in the company by its officers or employees, he must report it: to the Central Government above the prescribed amount, and to the audit committee or the Board below it.
The sub-section
Section 143(12), and the wording is worth having.
Notwithstanding anything contained in this section, if an auditor of a company in the course of the performance of his duties as auditor, has reason to believe that an offence of fraud involving such amount or amounts as may be prescribed, is being or has been committed in the company by its officers or employees, the auditor shall report the matter to the Central Government within such time and in such manner as may be prescribed.
And the two provisos.
Provided that in case of a fraud involving lesser than the specified amount, the auditor shall report the matter to the audit committee constituted under section 177 or to the Board in other cases within such time and in such manner as may be prescribed.
Provided further that the companies, whose auditors have reported frauds under this sub-section to the audit committee or the Board but not reported to the Central Government, shall disclose the details about such frauds in the Board's report in such manner as may be prescribed.
The five elements of the duty
| Element | What it means | |
|---|---|---|
| 1 | An auditor of a company | The duty is on the statutory auditor; it extends to the cost auditor and the secretarial auditor by section 143(14) |
| 2 | In the course of the performance of his duties as auditor | Not something he learns socially or in another engagement |
| 3 | Reason to believe | A lower threshold than proof; suspicion supported by something |
| 4 | An offence of fraud | As defined by the Explanation to section 447 |
| 5 | By its officers or employees | Not by outsiders. A fraud on the company by a customer is not within this sub-section |
Element five is the limit examiners test. A supplier who cheats the company has committed a fraud, and section 143(12) does not require the auditor to report it to the Government, because the person is neither an officer nor an employee.
Who is told, and when
| The amount involved | Report to | Route |
|---|---|---|
| At or above the prescribed amount | The Central Government | Through the Board or the audit committee first, for their reply, and then to the Government |
| Below the prescribed amount | The audit committee under section 177, or the Board where there is no audit committee | Directly |
And the second proviso closes the loop on the smaller frauds. A company whose auditor reported a fraud to the audit committee or the Board, and not to the Government, must disclose the details in the Board's report. So nothing reported under this sub-section stays invisible to the members.
The Auditor's Duties and Responsibilities in the Case of Fraud
The protection: section 143(13)
An auditor who reports in good faith is protected.
No duty to which an auditor of a company may be subject to shall be regarded as having been contravened by reason of his reporting the matter referred to in sub-section (12) if it is done in good faith.
This displaces the duty of confidentiality, which would otherwise stop him from telling anybody anything about his client. Quote it in any answer on the duty, because a student who describes the duty without it leaves the auditor in an impossible position.
The penalty for not reporting: section 143(15)
Failure to comply with sub-section (12) is punishable, and the penalty falls on the auditor personally, not on the company.
The duty distinguished from three neighbours
| What it requires | |
|---|---|
| Section 143(12) | To report a fraud by officers or employees to the Government or the Board |
| Section 143(3)(f) | To state in the audit report the observations or comments on financial transactions or matters which have any adverse effect on the functioning of the company |
| Section 143(2) | To report whether the statements give a true and fair view, which a material fraud would prevent |
| Section 134(3)(ca) | To have frauds reported by auditors under 143(12), other than those reportable to the Central Government, included in the Board's report |
Four different obligations arising out of one discovery, and a full answer names all four.
The steps for the auditor, in order
- Do not jump. Establish the facts as far as the audit permits; "reason to believe" is not a hunch.
- Consider materiality separately. The reporting duty under 143(12) does not depend on the fraud being material to the statements; a small fraud is still reportable under the proviso.
- Fix the amount, because the amount decides who is told.
- Follow the prescribed form and time. The Rules prescribe both.
- Consider the effect on the opinion. A material fraud makes the statements untrue and unfair, and the report must be modified.
- Document everything. The working paper on a suspected fraud is the auditor's own protection.
- Do not tell the press or anybody else. The protection in 143(13) covers the report under 143(12), not disclosure at large.
What the auditor must NOT do
He must not conduct the investigation himself as though he were an investigator, unless separately engaged. His duty is to report.
He must not agree to say nothing in exchange for the fraud being made good. The duty is statutory and cannot be compromised.
The Auditor's Duties and Responsibilities in the Case of Fraud
He must not resign in order to escape it. The duty arose when he had reason to believe, and resigning does not undo it.
Quick revision
| The section | 143(12) |
| Trigger | Reason to believe an offence of fraud is being or has been committed |
| By whom | Officers or employees of the company, not outsiders |
| Above the prescribed amount | The Central Government |
| Below it | The audit committee under section 177, or the Board |
| Board's report | Must disclose frauds reported below the threshold, section 134(3)(ca) |
| Protection | Section 143(13), good faith displaces confidentiality |
| Penalty for default | Section 143(15), on the auditor personally |
Test yourself
- Which sub-section imposes the duty, and what triggers it?
- Whose frauds are within it and whose are not?
- Who is told above the threshold and who below it?
- What happens to a fraud reported to the Board and not to the Government?
- What protects the auditor from a claim for breach of confidentiality?
Answer in one sentence
1. Section 143(12), triggered where the auditor, in the course of performing his duties, has reason to believe that an offence of fraud is being or has been committed in the company.
2. Frauds by the company's officers or employees are within it, and a fraud on the company by an outsider such as a customer or supplier is not.
3. The Central Government above the prescribed amount, and the audit committee under section 177 or the Board below it.
4. The company must disclose its details in the Board's report, under the second proviso to section 143(12) read with section 134(3)(ca).
5. Section 143(13), which provides that no duty to which the auditor is subject is regarded as contravened by his reporting under sub-section (12) in good faith.
The rest of this subject
These notes are cut from the University's printed syllabus. Open the syllabus itself, or the past papers, for the same subject.