Govt puts in place stringent disclosure norms for auditor reports of companies

Auditors will have to provide detailed disclosures about loan defaults, amount of cash losses and immovable properties as well as other aspects about companies in their annual reports starting this financial year, with the government putting in place a stringent framework.

Amid instances of corporate misdoings wherein the role of auditors has also come under the regulatory scanner, the corporate affairs ministry has come out with the revised framework that seeks to bring in "greater transparency and faith in the financial affairs of the companies".

The corporate affairs ministry has notified the Companies (Auditor's Report) Order, 2020 (CARO, 2020). It would be applicable for audit of financial statements of eligible companies for the financial years commencing on or after April 1, 2019.

 

"CARO 2020 would necessitate enhanced due diligence and disclosures on the part of auditors of eligible companies, and has been designed to bring in greater transparency in the financial state of affairs of such companies," the ministry said in a release on Wednesday.

A specific format has been prescribed for auditors to report the period and the amount of default by the company in repayment of loans or other borrowings or in the payment of interest thereon to any lender.

In a significant move, the ministry said auditors would have to provide details about a company's investments and whether any guarantee or security has been extended to other entities during a financial year. This is to ensure that such actions are not "prejudicial to the interests of the company".

"The amount of cash losses incurred in the financial year and in the immediately preceding financial year have to be reported," the release said.

As per the latest CARO, an auditor has to render opinion based on various aspects that "no material uncertainty exists as on the date of the audit report that company is capable of meeting its liabilities existing at the date of balance sheet as and when they fall due within a period of one year from the balance sheet date".

The ministry noted that the latest CARO is expected to significantly improve the overall quality of reporting by auditors on the financial statements of the companies.

This would lead to greater transparency and faith in the financial affairs of the companies. This is automatically expected to result in greater inflow of investment by and in Indian companies, it added.

Further, an auditor has to consider whistle-blower complaints received during a year by the company in the audit as well as report whether the company has conducted any non-banking financial or housing finance activities without a valid certificate of registration from the Reserve Bank of India.

Any objections or concerns raised by outgoing auditors should also be taken to consideration by present auditors before forming an opinion.

Among other requirements, an auditor has to report whether a company is a declared wilful defaulter and whether term loans were diverted for any purpose other than for which the amount was raised.

There is also a format for reporting details of such immovable properties whose title deeds are not held in the name of the company but are disclosed in the financial statements, the release said.

Details of proceedings against a company for holding benami property and whether the same have been disclosed in the financial statements also need to be disclosed in the CARO.

"Discrepancies of 10 per cent or more in the aggregate of each class of inventory noticed during physical verification of inventory would have to be reported," apart from specific details on whether a company has been sanctioned working capital limits in excess of Rs 5 crore in a particular financial year.

"The auditor is now required to indicate the details of the subsidiary companies and the sub-clauses' number containing qualifications/adverse remarks by the respective auditors in the CARO reports of the companies included in the consolidated financial statements," the release said.