According to the Companies Bill 2011, fraud is defined as “any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss”.
Where it is proved that the auditor/ partner or audit firm partners have, directly or indirectly, acted fraudulently or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers, the auditor/ partner or audit firm partners are liable for action, according to the Bill.
Reporting with business responsibility
Around this time last year, the Ministry of Corporate Affairs issued the National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business, or ESG Guidelines, which were an enhancement over the Voluntary CSR Guidelines issued earlier. The guidelines prescribe core principles to be followed by companies and a business reporting format with specified disclosures.
The capital market regulator, SEBI, has decided to make it mandatory for the top 100 listed companies to include ‘business responsibility reports’ in their annual report. It would be applicable for the financial year ending on or after December 31. Listed entities already reporting on sustainability, in accordance with internationally accepted frameworks, can use the same reports along with additional disclosures.
Clearly, the intent is to improve the quality of disclosure in public-listed companies, where public interest is involved.
Auditor as anti-fraud agent
Fraud is a broad concept that refers generally to any intentional act committed to secure an unfair or unlawful gain.
International Standard on Auditing 240 — the primary responsibility for the prevention and detection of fraud rests with those charged with the governance of the entity as well as the management.
Auditors as ‘one’, and not the ‘only’ gatekeepers also bear certain responsibility.
In India, the term ‘fraud’ has not been defined in Companies Bill 2011; however, other provisions that refer to fraud include:
Damages of fraud [Clause 75];
Directors’ responsibility [Clause 134(5)];
Added to the list of disqualifications of an auditor [Clause 141(3)];
Auditor is now required to report, if he has any reason to believe that any offence involving fraud is being committed or has been committed [Clause 143 (12)];
Inclusion of auditors as expert — civil liabilities for misstatements/fraudulent statements in prospectus [Clause 35];
Punishment for contravention by auditor [Clause 147 (4)] — during audit, if acted in a fraudulent manner, the liability shall be of the partner or partners of the audit firm concerned and of the firm jointly and severally; further, the partner or partners of the firm shall also be punishable under clause 447;
Punishment for fraud [Clause 447], which prescribes imprisonment from six months to 10 years and a fine not less than, but up to thrice the amount involved in the fraud; where the fraud involves public interest, imprisonment of not less than three years;
Class action suits can be brought against auditors for improper or misleading statement of particulars in the audit report, or for any fraudulent, unlawful or wrongful act or conduct [Clause 245];
Whistle-blowing mechanism [Clause 177(9) & (10)].