The Hindu Business Line : ICAI releases statement on CARO — For compliance with reporting requirements

THE Institute of Chartered Accountants of India has released its Statement on the Companies (Auditor's Report) Order, 2003 (CARO). The statement, which is mandatory for members of the institute, provides detailed guidance to auditors of companies on compliance with the reporting requirements laid down by the Order.

CARO was issued by the Union Government in June 2003, replacing the Manufacturing and Other Companies (Auditor's Report) Order, 1988.

The Order, i.e., CARO has enhanced considerably the reporting responsibilities of the auditors of companies by requiring them to comment upon, among other things, the diversion of funds; frauds on or by the company - noticed or reported; affect of sale of substantial part of fixed assets on the going concern status of the company; and continuing failure to correct major weakness in internal control.

An ICAI official said that the statement released by the institute would result in achieving the compliance with the Order in letter and spirit.

Now, the reports of the auditors would be dealing about the diversion of funds, if any. For example, if a company raises a term loan from a bank for purchase of a plant and machinery but utilises the same for investing in the shares or other securities of a subsidiary, the auditor's report would point out the mis-utilisation. Investors would also come to know, through the auditor's report, whether the company has applied the funds raised through public issues for the declared purpose since the auditor would also report on the disclosure and verification of the end use of funds raised by public issues.

Further, a question of vital concern to all - going concern status of the company. If a company sells a substantial part of its fixed assets, the auditor would examine whether sale of such substantial part of fixed assets has affected the going concern and accordingly report.

The auditor's report would also indicate the nature and amount involved in a fraud, if any, that has been noticed or reported either on the company or by the company. The statement clarifies that a fraud involving one or more members of management or those charged with governance or a fraud involving only employees of the company may be construed as a "fraud by the company" while a fraud committed by a third party may be termed as "fraud on the company."

The statement also deals extensively with other significant aspects of the Order, for example, applicability of the Order to a private company, issues to consider in respect of paid-up capital and reserves, outstanding loans, public deposits, financial institutions, turnover, date of determination of limits in respect of all these aspects, period of compliance, general approach to the Order, etc.