The
Ministry of Corporate affairs released the Companies (Auditor's Report) Order,
2020 on 25th February 2020. This order has been issued in supersession of the
Companies (Auditor's Report) Order, 2016, released on 29th March 2016. The applicability is for reporting on
financial statements of companies whose financial year commences on or after
1st April 2019. CARO 2020 has been issued after consultation with the National
Financial Reporting Authority constituted under section 132 of the Companies
Act, 2013.
The
applicability of the new rules has been deferred recently and is now applicable
from FY 2020- 21.
There
has been number of new requirements on which Auditors has to report under
Section 143 of the Companies Act, 2013 on the account of every company to which
this Order applies and the same is expected to result in greater transparency
into the operations of the Organization. It’s a welcome step by MCA and I hope
that the same would prove beneficial to the stakeholders at large. The total
number of clauses in this edition of CARO is 21.
Applicability
This Order shall apply to every
company including a foreign company as defined in clause (42) of section 2 of
the Companies Act, 2013 (18 of 2013) [hereinafter referred to as the Companies
Act], except–
(i) a banking company as defined in
clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949);
(ii) an insurance company as defined
under the Insurance Act,1938 (4 of 1938);
(iii) a company licensed to operate
under section 8 of the Companies Act;
(iv) a One Person Company as defined
in clause (62) of section 2 of the Companies Act and a small company as defined
in clause (85) of section 2 of the Companies Act; and
(v) a private limited company,
not being a subsidiary or holding company of a public company, having a paid up
capital and reserves and surplus not more than one crore rupees as on the balance
sheet date and which does not have total borrowings exceeding one crore rupees
from any bank or financial institution at any point of time during the
financial year and which does not have a total revenue as disclosed in
Scheduled III to the Companies Act (including revenue from discontinuing
operations) exceeding ten crore rupees during the financial year as per the
financial statements.
Provided this Order shall
not apply to the auditor’s report on consolidated financial statements except
clause (xxi) of paragraph 3.
Matters
to be included in the Auditor’s report-
Matters
to be included in auditor's report- The auditor's report on the accounts of a
company to which this Order applies shall include a statement on the following
matters, namely:-
Property,
Plant and Equipment – (PPE) Clause 3 (i)
i. (a)
(A) whether the company is maintaining proper records showing full particulars,
including quantitative details and situation of Property, Plant and Equipment;
(B)
whether the company is maintaining proper records showing full particulars of
intangible assets;
(b)
whether these Property, Plant and Equipment have been physically verified by
the management at reasonable intervals; whether any material discrepancies were
noticed on such verification and if so,whether the same have been properly
dealt with in the books of account;
(c)
whether the title deeds of all the immovable properties (other than properties
where the company is the lessee and the lease agreements are duly executed in
favour of the lessee) disclosed in the financial statements are held in the
name of the company, if not, provide the details thereof in the format below:-
|
Description of
property
|
Gross carrying
value
|
Held in name of
|
Whether promoter,
director or their relative or employee
|
Period held –
indicate range, where appropriate
|
Reason for not
being held in name of company*
|
|
-
|
--
|
-
|
-
|
-
|
*also indicate if
in dispute
|
(d)
whether the company has revalued its Property, Plant and Equipment (including
Right of Use assets) or intangible assets or both during the year and,if so,
whether the revaluation is based on the valuation by a Registered Valuer;
specify the amount of change, if change is 10% or more in the aggregate of the
net carrying value of each class of Property, Plant and Equipment or intangible
assets;
(e)
whether any proceedings have been initiated or are pending against the company
for holding any benami property under the Benami Transactions (Prohibition)
Act, 1988 (45 of 1988) and rules made thereunder, if so, whether the company
has appropriately disclosed the details in its financial statements;
Observation-
Reporting
on Intangibles has been made mandatory which was not there in erstwhile order.
Disclosures with respect to ownership or on lease basis are required with
respect to all the Immovable properties appearing in the Balance Sheet. In case
the property appearing in the BS is not in the name of the Company, appropriate
reasons for the same needs to be disclosed. Change of 10% or more arising out
of revaluation of any assets ( including Right of Use assets) in the
aggregate of the net carrying value of each class of Property, Plant and
Equipment or intangible assets and whether the revaluation is as per the
valuation done by a Registered Valuer needs to be reported.
Further
in case of any benami transactions for which any proceedings have been
initiated or are pending, the auditor needs to report on whether appropriate
disclosures are made in the Financial Statements.
Inventory
-Clause 3 (ii)]
(a)
whether physical verification of inventory has been conducted at reasonable
intervals by the management and whether, in the opinion of the auditor,the
coverage and procedure of such verification by the management is appropriate;
whether any discrepancies of 10% or more in the aggregate for each class of
inventory were noticed and if so, whether they have been properly dealt with in
the books of account;
(b)
whether during any point of time of the year, the company has been sanctioned
working capital limits in excess of five crore rupees, in aggregate, from banks
or financial institutions on the basis of security of current assets; whether
the quarterly returns or statements filed by the company with such banks or
financial institutions are in agreement with the books of account of the
Company, if not, give details;
Observation
For the
first time, discrepancy threshold of 10% or more in the aggregate for each
class of inventory has been provided in respect of the physical verification
conducted by the Management versus the numbers in the financial statements.
New
reporting on the working capital loan in excess of five crore rupees, in
aggregate, from banks or financial institutions on the basis of security of
current assets with respect to compliance with the quarterly returns or
statements filed by the company has been provided in the new Order.
Investments/
Providing any guarantee or security or granted loans and advances -Clause 3
(iii)
whether
during the year the company has made investments in, provided any guarantee or
security or granted any loans or advances in the nature of loans, secured or
unsecured, to companies, firms, Limited Liability Partnerships or any other
parties, if so,-
(a)
whether during the year the company has provided loans or provided advances in
the nature of loans,or stood guarantee,or provided security to any other entity
[not applicable to companies whose principal business is to give loans], if so,
indicate-
(A) the
aggregate amount during the year, and balance outstanding at the balance sheet
date with respect to such loans or advances and guarantees or security to
subsidiaries, joint ventures and associates;
(B) the
aggregate amount during the year, and balance outstanding at the balance sheet
date with respect to such loans or advances and guarantees or security to
parties other than subsidiaries, joint ventures and associates;
(b)
whether the investments made, guarantees provided, security given and the terms
and conditions of the grant of all loans and advances in the nature of loans and
guarantees provided are not prejudicial to the company's interest;
(c) in
respect of loans and advances in the nature of loans, whether the schedule of
repayment of principal and payment of interest has been stipulated and whether
the repayments or receipts are regular;
(d) if
the amount is overdue, state the total amount overdue for more than ninety
days, and whether reasonable steps have been taken by the company for recovery
of the principal and interest;
(e)
whether any loan or advance in the nature of loan granted which has fallen due
during the year, has been renewed or extended or fresh loans granted to settle
the overdues of existing loans given to the same parties, if so, specify the
aggregate amount of such dues renewed or extended or settled by fresh loans and
the percentage of the aggregate to the total loans or advances in the nature of
loans granted during the year [not applicable to companies whose principal
business is to give loans];
(f)
whether the company has granted any loans or advances in the nature of loans
either repayable on demand or without specifying any terms or period of
repayment, if so, specify the aggregate amount, percentage thereof to the total
loans granted, aggregate amount of loans granted to Promoters, related parties
as defined in clause (76) of section 2 of the Companies Act, 2013;
Observation-
This
clause covers reporting of loan given to not only entities covered in Sec 189
of the Companies Act, 2013 but the same is extended to any loan provided
not covered under Sec 189 of the Act as well. This will have far reaching
impact and the disclosures needs to be seen in coming times.
Also it
has been newly inserted that in case a new loan has been taken to repay the
already running loan or the current loan is extended for a particular period,
the same as a percentage of the Total loan outstanding at year end needs to be
reported. This is not applicable to companies whose principal business is to
give loans.
Further
the clause also mandates reporting of cases where loans or advances have been
given on either repayable on demand or without specifying any terms or period
of repayment and the percentage of the same to the total loan outstanding at
the year end.
Compliance
with Sec 185 and 186 of the Companies Act -Clause 3 (iv)
in
respect of loans, investments, guarantees, and security, whether provisions of
sections 185 and 186 of the Companies Act have been complied with, if not,
provide the details thereof;
Observation-
No
change when compared to erstwhile 2016 Order.
Acceptance
of Deposits [Clause 3 (v)]
in
respect of deposits accepted by the company or amounts which are deemed to be
deposits, whether the directives issued by the Reserve Bank of India and the
provisions of sections 73 to 76 or any other relevant provisions of the
Companies Act and the rules made thereunder, where applicable, have been
complied with, if not, the nature of such contraventions be stated; if an order
has been passed by Company Law Board or National Company Law Tribunal or
Reserve Bank of India or any court or any other tribunal, whether the same has
been complied with or not;
Observation
No
change when compared to erstwhile 2016 Order.
Maintenance
of Cost Records -Clause 3 (vi)
whether
maintenance of cost records has been specified by the Central Government under
sub-section(1) of section 148 of the Companies Act and whether such accounts
and records have been so made and maintained;
Observation
No
change when compared to erstwhile 2016 Order.
Depositing
Statutory Dues -Clause 3 (vii)
(a)
whether the company is regular in depositing undisputed statutory dues
including Goods and Services Tax, provident fund, employees' state insurance,
income-tax, sales-tax, service tax, duty of customs, duty of excise, value
added tax, cess and any other statutory dues to the appropriate authorities and
if not, the extent of the arrears of outstanding statutory dues as on the last
day of the financial year concerned for a period of more than six months from
the date they became payable, shall be indicated;
(b)
where statutory dues referred to in sub-clause (a) have not been deposited on
account of any dispute, then the amounts involved and the forum where dispute
is pending shall be mentioned (a mere representation to the concerned
Department shall not be treated as a dispute);
Observation-
Goods
and Service Tax has been added to the list of the statutory dues.
Reporting
of Transactions not covered in books of account -Clause 3 (viii)
whether
any transactions not recorded in the books of account have been surrendered or
disclosed as income during the year in the tax assessments under the Income Tax
Act, 1961 (43 of 1961), if so, whether the previously unrecorded income has
been properly recorded in the books of account during the year;
Observation –
New
clause which covers reporting of transactions not covered in the books of
account having been disclosed as income in the tax assessment and corresponding
effect of the same in the financial statements. This is probably to cover
transactions reported in Voluntary Disclosure Schemes which are bought by
government from time to time.
Repayment
of Loan -Clause 3 (ix)
(a) whether the company has defaulted in repayment of loans or
other borrowings or in the payment of interest thereon to any lender, if yes,
the period and the amount of default to be reported as per the format below:-
|
Nature of borrowing
including debt securities
|
Name of lender
|
Amount not paid on
due date
|
Whether principal
or interest
|
No. of days delay
or unpaid
|
Remarks, if any
|
|
-
|
*lender wise
details to be provided in case of defaults to banks, financial institutions
and Government
|
-
|
-
|
-
|
-
|
(b)
whether the company is a declared willful defaulter by any bank or financial
institution or other lender;
(c)
whether term loans were applied for the purpose for which the loans were
obtained; if not, the amount of loan so diverted and the purpose for which it
is used may be reported;
(d)
whether funds raised on short term basis have been utilized for long term
purposes, if yes, the nature and amount to be indicated;
(e)
whether the company has taken any funds from any entity or person on account of
or to meet the obligations of its subsidiaries, associates or joint ventures,
if so, details thereof with nature of such transactions and the amount in each
case;
(f)
whether the company has raised loans during the year on the pledge of
securities held in its subsidiaries, joint ventures or associate companies, if
so, give details thereof and also report if the company has defaulted in
repayment of such loans raised;
Observation-
Firstly,
previously lender wise details was required and there was no specific format.
Now format has been provided to provide the principal and interest amount,
delay period and remarks if any (probably covering Settlement expected to be
done details). Also it says any lender is covered for reporting.
Secondly,
auditor needs to specifically mention that the company is declared as a willful
defaulter or not by any bank or financial institution or any lender whatsoever.
Thirdly,
the reporting on whether term loans in the books of the company were applied
for which the loans were procured and if not the amount and the reasons for
deviation from purpose needs to be disclosed.
Fourthly,
in case the company has taken any funds from any entity or person to meet the
requirements of its subsidiaries, associates or joint ventures, the details
needs to be provided for in the audit report.
Fifthly,
in case any loan has been raised on the pledge of securities held in its
subsidiaries, associates or joint ventures or associate companies, the details
needs to be provided along with default in payment of the same.
This
particular clause will provide the readers of the financial statements the
total exposure of loan and will help in arriving at more accurate financial
ratios and understanding financial projection and thereby enable effective
decisions.
Money
raised through IPO and further public offer -Clause 3 (x)
(a)
whether moneys raised by way of initial public offer or further public offer
(including debt instruments) during the year were applied for the purposes for
which those are raised, if not, the details together with delays or default and
subsequent rectification, if any, as may be applicable, be reported;
(b)
whether the company has made any preferential allotment or private placement of
shares or convertible debentures(fully, partially or optionally convertible
)during the year and if so, whether the requirements of section 42 and section
62 of the Companies Act, 2013 have been complied with and the funds raised have
been used for the purposes for which the funds were raised, if not, provide
details in respect of amount involved and nature of non-compliance;
Observation-
Raising
of money through preferential allotment or private placement of shares or
convertible debentures has been added to the erstwhile raising of fund only by
IPO or further public offer. The reporting with respect to the requirements
under the Act and the subsequent utilization of the same needs to be disclosed.
It is to be noted that the point b was covered under in Clause 3 (xiv) of the
erstwhile order CARO 2016. So in effect no change when compared to last order.
Disclosure
regarding Fraud -Clause 3 (xi)
(a)
whether any fraud by the company or any fraud on the company has been noticed
or reported during the year, if yes, nature and the amount involved is to be
indicated;
(b)
whether any report under sub-section (12) of section 143 of the Companies Act
has been filed by the auditors in FormADT-4 as prescribed under rule 13 of
Companies (Audit and Auditors) Rules, 2014 with the Central Government;
(c)
whether the auditor has considered whistle-blower complaints, if any, received
during the year by the company;
Observation-
Additional
requirements to have the compliance done under Sec 143 of the Companies Act and
the consideration of whistle blower complaints by the auditor needs to be
reported.
Nidhi
Company -Clause 3 (xii)
(a)
whether the Nidhi Company has complied with the Net Owned Funds to Deposits in
the ratio of 1: 20 to meet out the liability;
(b)
whether the Nidhi Company is maintaining ten percent. unencumbered term
deposits as specified in the Nidhi Rules,2014 to meet out the liability;
(c)
whether there has been any default in payment of interest on deposits or
repayment thereof for any period and if so, the details thereof;
Observation-
Default
in payment by Nidhi company needs to be reported with adequate details.
Related
Party Transaction -Clause 3 (xiii)
Whether
all transactions with the related parties are in compliance with sections 177
and 188 of Companies Act where applicable and the details have been disclosed
in the financial statements, etc., as required by the applicable accounting
standards;
Observation-
No
change when compared to erstwhile 2016 Order.
Internal
Audit-Clause 3 (xiv)
(a)
whether the company has an internal audit system commensurate with the size and
nature of its business;
(b)
whether the reports of the Internal Auditors for the period under audit were
considered by the statutory auditor;
Observation-
This is
a new requirement when compared to 2016 order which lays down the importance of
Internal audit. Also reporting needs to be on whether the Internal audit report
has been considered by the Statutory auditor. It is to be seen how this
particular disclosure as the same is quite subjective and does not mention the
parameters/ extent of coverage on which this reporting needs to be done.
Non
-Cash Transaction -Clause 3 (xv)
whether
the company has entered into any non-cash transactions with directors or
persons connected with him and if so, whether the provisions of section 192 of
Companies Act have been complied with;
Observation-
No
change when compared to erstwhile 2016 Order.
Registration
under Sec 45-IA of the Reserve Bank of India Act, 1934 -Clause 3 (xvi)
(a)
whether the company is required to be registered under section45-IA of the
Reserve Bank of India Act, 1934 (2 of 1934) and if so, whether the registration
has been obtained;
(b)
whether the company has conducted any Non-Banking Financial or Housing Finance
activities without a valid Certificate of Registration (CoR) from the Reserve
Bank of India as per the Reserve Bank of India Act,1934;
(c)
whether the company is a Core Investment Company (CIC) as defined in the
regulations made by the Reserve Bank of India, if so, whether it continues to
fulfill the criteria of a CIC, and in case the company is an exempted or
unregistered CIC, whether it continues to fulfill such criteria;
(d)
whether the Group has more than one CIC as part of the Group, if yes, indicate
the number of CICs which are part of the Group;
Observation-
Point b,
c, d are newly inserted to report on any financing activities (NBFC or HFC)
provided by a company without a valid certificate from Reserve Bank of India
which is mandated by RBI Act.
Also
reporting on whether company is a Core Investment Company (CIC) as defined in
the regulations made by the Reserve Bank of India and if yes, the criteria or
the conditions are being complied by the company.
Cash
Losses -Clause 3 (xvii)
whether
the company has incurred cash losses in the financial year and in the
immediately preceding financial year, if so, state the amount of cash losses;
Observation-
Reporting
of cash losses has been made mandatory to provide insights into the cash flows
of the company as part of the audit report.
Resignation
of Statutory Auditors -Clause 3 (xviii)
whether
there has been any resignation of the statutory auditors during the year, if
so, whether the auditor has taken into consideration the issues, objections or
concerns raised by the outgoing auditors;
Observation-
This is
a new requirement which mandates reporting of resignation by the Statutory
Auditors ( Specifically Statutory Auditor is covered only) and further whether
the new auditor has taken into consideration of the issues, objections or
concerns raised by outgoing auditors needs to be reported. This again is
subjective and will differ in reporting from company to company as there are no
set parameters laid to enable this reporting. Recently there has been number of
cases where the resignation of auditors happening on unearthing of financial
scams and also stopping of non -audit services by firms who are statutory
auditors. This reporting will provide insights which probably the financial
statements might have missed out.
Financial
ratios -Clause 3 (xix)
on the
basis of the financial ratios, ageing and expected dates of realization of
financial assets and payment of financial liabilities, other information
accompanying the financial statements, the auditor's knowledge of the Board of
Directors and management plans, whether the auditor is of the opinion 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;
Observation-
This is
a very onerous move which mandates auditors to report on the future financial
projections of the company in the sense that the company does not face any
material uncertainty on the date of the audit report and it will be capable of
meeting its liabilities existing at the date of BS as per the due date within a
period of one year from the BS date. This report factors into having financial
modelling and projections to be done which was erstwhile missing earlier.
The
materiality threshold is not defined and would vary company to company. It is
suggested certain parameters be laid to define material thresholds which
enables the understanding of financial projections and thereby help in
effective and informed decisions.
Corporate
Social Reporting Clause 3 (xx).
(a)
whether, in respect of other than ongoing projects, the company has transferred
the unspent amount to a Fund specified in Schedule VII to the Companies Act
within a period of six months of the expiry of the financial year in compliance
with second proviso to sub-section (5) of section 135of the said Act;
(b)
whether any amount remaining unspent under sub-section (5) of section135 of the
Companies Act, pursuant to any ongoing project, has been transferred to special
account in compliance with the provision of subsection (6) of section 135 of
the said Act;
Observation-
This is
a new requirement again. It is to be noted that while MCA has not notified the
proposed circular for transferring of unspent amount to a separate special bank
account, the reporting of which has been mandatory as per CARO rules 2020. There
is very high probability that the notification from MCA regarding CSR unspent
amount will be rolled out on or before March 31 2020 to ensure that the
reporting covers the financial year 2019-2020.
This
clause will force companies to better regulate their CSR projects and be more
responsible towards the society at large.
Qualifications
or Adverse Remarks -Clause 3 (xxi)
whether
there have been any qualifications or adverse remarks by the respective
auditors in the Companies (Auditor's Report) Order (CARO) reports of the
companies included in the consolidated financial statements, if yes, indicate
the details of the companies and the paragraph numbers of the CARO report
containing the qualifications or adverse remarks.
Observation-
This is
a new requirement which mandates reporting of companies ( ex -subsidiaries)
which should be report in the consolidated financial statements ( ex- holding
company), providing the details of such companies and the reference in their
respect CARO report containing details of qualifications or adverse remarks.
Basis
for unfavourable or qualified remarks -Clause 4
(1)
Where, in the auditor's report, the answer to any of the questions referred to
in paragraph 3 is unfavourable or qualified, the auditor's report shall also
state the basis for such unfavourable or qualified answer, as the case maybe.
(2)
Where the auditor is unable to express any opinion on any specified matter, his
report shall indicate such fact together with reasons as to why it is not
possible for him to give his opinion on same
Observation-
No
change when compared to erstwhile 2016 Order.
Overall,
the changes are welcome and will result in greater transparency and immensely
help the readers of the financial statements and the society at large.
Disclaimer – CARO
Rules as published at MCA portal has been referred while preparing this article.
This article is meant for understanding purposes only and in no way be deemed
to be an advice or solicit any marketing whatsoever. Any decisions based on this
article would not held me liable for any action whatsoever. Please get in touch
with your legal consultants to understand the scope and impact pertaining to
your industry.
