Mohan Lavi

New CARO requirements add to auditors’ burden

Mohan R Lavi | Updated on March 16, 2020 Published on March 16, 2020

The new reporting requirements under the Companies (Auditors’ Report) Order will only make the audit report lengthier and complex for shareholders

Recently, the Ministry of Corporate Affairs issued the 2020 version of the Companies (Auditors’ Report) Order (CARO). Basically, the CARO is a pre-identified list of areas and events that the auditor has to report. While the earlier version had 16 clauses, the new one has 21.

Unlike CARO 2016, which required reporting on all fixed assets, the new requirements focus on property, plants, equipment and intangible assets. Reporting of proceedings under the Benami Transactions (Prohibition) Act, 1988 has also been included.

In addition, the auditor must report on compliance if the company was sanctioned working capital limits in excess of ₹5 crore or more from banks or financial institutions, and on investments in/providing of any guarantee or security/granting of any loans or advances to companies, firms, limited liability partnerships or any other parties. Auditors must also report on compliance with RBI directives and the provisions of the Companies Act, 2013, with respect to deemed deposits; and transactions not recorded in the books of account surrendered or disclosed as income in the income tax proceedings. There is also a comprehensive reporting requirement for default in the repayment of loans/other borrowings, or in the payment of interest.

A surprising addition is the need to report on treatment by auditor of whistle-blower complaints received by the company. The CARO 2020 also specifies reporting on internal audit system, cash losses, resignation of the statutory auditors, uncertainty of the company’s capability to meet its liabilities, transfer of unspent CSR amount to the fund specified in Schedule VII, and on qualifications or adverse remarks by the auditors in the CARO reports of companies included in the consolidated financial statements.

Needless to say, the new requirements will only make the audit report lengthier. An ordinary shareholder with minimal knowledge of the Companies Act/Auditing Standards is going to be left wondering what the auditors are trying to convey. It is also obvious that some of the new clauses have been a reaction to recent developments — eg, uncertainly of the company’s capability to meet its liabilities (IL&FS saga), and the compliances with RBI directives (DHFL and PMC Bank).

Auditors would need to spend more time and resources and develop new skills to figure out if a certain company cannot meet its liabilities. A more fundamental point is whether the auditor needs to comment on the cash-flow strategies of the management. Audit reports revolve around accounting, and auditing standards and the accounting standard on cash flows only prescribe the presentation of cash flows, and not management.

The risks that auditors take under the CARO are obviously going to be higher. However, since the auditing fee is invariably fixed by the management, auditors are always at the lower end of the risk-reward ratio. The Institute of Chartered Accountants of India should step in and ensure that auditors are rewarded adequately for risks they take.

Despite covering many new areas, the CARO 2020 is silent on impairment of assets and major changes in fair value, both of which could have a significant impact on financial statements. This is bound to happen if the MCA picks and chooses what must be reported. Since both accounting and auditing standards are comprehensive, the audit report should state if all these standards have been followed by the entity without any deviation.

Not only would this make the audit report shorter, it would also give the auditor an opportunity to express his views freely without being restricted by what must to see and how he must report it. A CARO 2021 on the cards, maybe?

The writer is a chartered accountant

Published on March 16, 2020
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