‘Resigning auditor must flag if fraud is noticed’: NFRA
New Delhi, June 26, 2023
Audit watchdog, the National Financial Reporting Authority (NFRA) on Monday said that quitting audit assignment does not absolve a statutory auditor of his responsibility to report fraud noticed during the audit.
It is a misconception among auditors that resigning from audit engagement will absolve them from consequences of not reporting a fraud, NFRA said in an order to the auditors of public interest entities governed by it.
Citing the Companies Act, audit standards, among other rules, the watchdog said auditors are required to report all frauds of ₹1 crore or above to the company’s board of directors or audit committee, and to the central government. The regulator also said that fraud is defined broadly and includes acts of omission, concealment of fact or abuse of position with the intent to deceive, or gain undue advantage or injure the interest of a company, shareholders or creditors, even if there were no wrongful gain or wrongful loss. “There is a misconception among some auditors that resigning from audit engagement absolves them of reporting obligations related to fraud and the consequences under Companies Act 2013 for non-reporting fraud," NFRA said in the order.
It also cited a judgment by the Supreme Court last month, which held that penal consequences of collusion or abetting in fraud will also apply to cases where auditors resign from their audit engagements without reporting the fraud or suspected fraud.
The statutory auditor is duty bound to report to the Central Government even in cases where the he is not the first person to identify the fraud or suspected fraud, NFRA said. “Resignation does not absolve the auditor of his responsibility to report suspected fraud or fraud as mandated by the law. The statutory auditor shall exercise his/her own professional skepticism while evaluating fraud, and need not be influenced by legal opinion provided by the company or its management," said the watchdog.
NFRA has taken stringent action against auditors, especially in the case of some of the group entities of Infrastructure Leasing & Financial Services Limited (IL&FS) for certain years leading to its financial distress and eventual replacement of board of directors by the government in 2018. The government appointed board sought to salvage the group and as of end of March 2023, the total debt discharged to IL&FS group creditors stands at ₹28,848 crores, as per information available from the group’s website.
[Mint]
