Compliance with new rules for audit reports deferred to next financial year

The Ministry of Corporate Affairs has deferred the implementation of Company Auditor’s Report Order (CARO) 2020, which brought about important disclosure requirements, by a year to April 2022 a government notification said. This is the second time that the government has pushed the deadline for compliance of the CARO 2020.

At the start of the first lockdown in March, MCA had deferred CARO 2020 implementation to 2020-21, keeping in mind auditing challenges during the pandemic such as physical verification of inventory, fixed assets, balance confirmations, fair value measurements, expected credit losses, going concern and impairment.

"Covid 19 has caused significant disruptions forcing the companies to focus on ensuring business continuity. Deferral of CARO ‘2020 by one year will give the much needed relief to companies and they will be able to use the additional time to prioritise allocation of resources and better prepare for the enhanced requirements. It will be equally helpful for the auditors as well," said, Sanjeev Singhal, Partner, SR Batliboi and Co LLP.

CARO 2020, the new audit format was introduced to enhance due diligence and disclosures by auditors and bring greater transparency into the financial affairs of companies. It requires auditors to comment on 50 matters as against 21 matters in the 2016 version of the order.

“It seems that the government does not want to further pressurise companies to give explanations to observations of auditors as non compliances may have been triggered due to Covid-19,” said Ankit Singhi, partner, Corporate Professionals.

The government has asked auditors to provide details like loans given by a company for reporting whistleblower complaints and assessing internal audit mechanisms of firms.

The revisions have also put greater onus on companies to share information with the auditors. The regulations were a result of learnings from fraudulent activities in companies that took advantage of loopholes in the law to misguide investors and regulators.

Taking a cue from cases such as IL&FS, where the holding company investor did not know the goings-on of its over 300 subsidiaries, the government has asked auditors to mention any qualifications or adverse remarks by the respective auditors of the companies included in the consolidated financial statements

The clauses of CARO 2016 were redrafted to ask auditors to provide details such as immovable properties whose title deeds are not held in the name of the company but are disclosed in the financial statements.

Disclosure of details of proceedings against the company for holding benami property and whether the company has disclosed the details in its financial statements is also to be mentioned by the auditor.

While earlier rules required the auditor to report any fraud by the promoter or the officials of the company, the audit report will now have to report any fraud by or on the company.

The auditor will also be required to provide their opinion on the financial ratios, ageing and expected dates of realisation of financial assets and payment of financial liabilities.