The auditor’s responsibility today is limited to obtaining a reasonable assurance that the financial statements, taken as a whole, are free from material misstatement, whether through fraud or error.

It is well known that the risk of non-detection of fraud is high, as sophisticated and carefully organised schemes may be invoved in concealing it. Fraud detection techniques may also not be successful, as the nature and occurrence of fraud depends on various factors such as the skill of the perpetrator, the frequency and extent of manipulation, the degree of collusion, the relative size of individual amounts manipulated, and the seniority of the individuals involved. Therefore, an auditor may only be able to identify potential opportunities for fraud by evaluating the risk factors and assess their impact on financial statements.

Currently, audit of companies involves reporting on whether any fraud is noticed or reported during the year. In the audit of banks, the auditor should report to the Reserve Bank of India anything found susceptible to fraud, acts of excess power, or foulplay in any transaction. Under the new Companies Bill, the auditor has significant onerous responsibility.

While the current standard requires the auditor to address fraud in relation to financial statements, the proposed Bill terms fraud as any act committed to injure the interests of the company, shareholders, creditors, or any other person.

The proposed definition of fraud is too vast, and extends beyond financial statements to cover all fraud, including management fraud, technology fraud, piracy, breach, mass marketing fraud, identity theft, electronic fraud, online fraud, and so on.

The existing standard allows the auditor to use his professional judgment to evaluate the magnitude of suspected fraud, whereas the Bill expects the auditor to report to the Central Government any act, omission, concealment of facts, or abuse of position.

The present auditing standard requires the auditor to evaluate fraud that could result in material misstatements in the financial statements attested by him; whereas the new legislation requires him to report on frauds where there is an intent to deceive, whether or not it results in a wrongful gain or loss.

Under the present legislation, the auditor reports on fraud in his audit report annually; under the proposed Bill the auditor should report immediately to the Central Government, in the prescribed time and manner, if fraud is being committed or has been committed. Besides, the auditor, cost accountant or company secretary who does not report fraud, if any, would be liable for a fine between Rs 1 lakh and Rs 25 lakh.

It is possible that each of these professionals may come across fraud only when discharging their duty but may not be aware of instances that happened any time during the year. Will they be liable for not reporting the same?

At present the auditor is charged for non-performance or negligence in his personal capacity. The Bill casts the responsibility on the partner, concerned partners, and joint and several liability on the partners of the firm.

The punishment for collusion in a fraud is simple imprisonment from six months to 10 years, and a fine up to thrice the amount involved in the fraud. In the absence of a definition, does a ‘concerned partner’ include partners who have acted in the capacity of an internal specialist, advisory partner and peer reviewer? Are both criminal and civil liabilities joint and several on the firm of partners?

While the intent of the new legislation to fix greater responsibility on the professionals is welcome, the proposed provisions raise concerns due to lack of clarity. Furthermore, to expect the auditor to step into the shoes of management and other relevant agencies to detect all kinds of fraud is beyond the scope of his role. Also, the punitive provisions for non-detection are harsh.

In today’s environment, where legal proceedings are not necessarily swift, fair, or certain, it is critical that legislation should be definite, clear and specific to safeguard against unjust enforcement and prolonged consequences.

The author is Partner, Deloitte Haskins & Sells

Related Topics
comment COMMENT NOW