Breaking News

CARO 2020: A sensible move

By Shivanand Pandit

With a view to augmenting transparency in the corporate audit segment, the Ministry of Corporate Affairs introduced numerous changes to the rules governing audit reports of companies by incorporating specific revelation norms which will not allow the business entities to hide facts on the grounds of materiality or probability and announced the notification of the Companies (Auditor’s Report) Order 2020 (CARO 2020).

This order issued on 25th February 2020 substitutes the previous order which was issued in 2016 and is applicable for reporting on the financial statements of the companies for the financial year 2019-20 and beyond.. CARO 2020 is applicable to all class of companies as specified in CARO 2016 and no change has been specified.

As per CARO the auditor has to express true and fair view on certain clauses mentioned in the order and should highpoint qualifications or disparities in Italics. The order is annexed to the main audit report in which an auditor gives declaration on whether the accounting standard and Companies Act conformities were complied with.

With the implementation of new order some new clause has been added to reporting while some of the existing clauses have been amended. Also, some clause has been deleted. The New CARO 2020 has 21 Clauses as against 16 Clauses in 2016. Now let us look into the new changes

The company has to maintain proper records showing full details of property, plant and equipment (PPE) and intangible assets. The management has to report on physical verification of PPE at constant intervals and divergences noticed.

The auditor has to verify the validity of the title deeds of all immovable properties disclosed in the financial statements. If not, details have to be mentioned in the prescribed report. He has to inform on revaluation of PPE or Intangible assets or both and if the change in the net value is more than 10 per cent then the amount of change has to be disclosed.

The auditor has to report on proceedings initiated or pending against the company for holding Benami property under the Benami Transactions Act.

If the company has obtained working capital in excess of Rs five crores in total from financial institutions on the basis of the security of current assets, the auditor has to verify the quarterly returns or statements filed with the financial institutions are in accord with the books of accounts. 

If the company has made investments in, provided any guarantee or security or granted any loans or advances to companies or LLPs or any other party, same has to be reported by the auditor. If any new loan has given to clear old loan or there has been an extension in existing loan, the amount and percentage of such loan to total loan has to be reported.

Unrecorded transactions surrendered or disclosed as income during the year under voluntary disclosure or Vivad se Vishwas scheme etc has to be reported.

If the company has been stated as willful defaulter by any bank or financial institution or other lenders, the auditor has to disclose the fact.

The auditor has to provide assurance that term loans applied for the objective for which they have obtained and if not then amount of loan and the purpose for which it has obtained to be reported.

Funds borrowed for short term objects have utilized for long term purposes, funds taken from any entity or person to meet the obligation of its subsidiaries, associates or joint ventures and loans obtained during the year from the pledge of securities held in its subsidiaries, associates and Joint ventures have to be disclosed.

The auditor has to disclose the whistleblower complaints if any received during the year.

The auditor has to examine the efficacy of the Internal Audit system and whether reports of internal auditors have been duly considered. He has to verify that whether the company has conducted any Non-Banking Financial or Housing Finance Activities without a valid certificate of registration from Reserve Bank of India.

If the company is a core investment company (CIC) and the group has more than one CIC, the number of CICs in the group has to be indicated.

If the company has suffered cash losses in the fiscal year and in the immediately previous fiscal year, the amount of cash losses has to be mentioned.

The incoming or new auditor has to disclose the reasons and concerns of outgoing auditor’s resignation.

True and fair opinion has to be expressed by the auditor about the non-existence of material uncertainty based on financial ratios and management plans.

Whether in respect of completed projects, the unspent amount of funds has been dealt according to the provisions of the Companies Act has to be reported.

To conclude, the new order will significantly increase  paperwork because the auditor has to comment on 50 matters including sub-clauses instead of 21 matters earlier. This is a momentous expansion in scope and it remains to be seen how much it adds to transaction cost and postponements in practice. It is important that audit companies should extend their helping hand to implement the rules efficiently. If they do not do so, the entire process is naturally called into question.

While the disclosures are rigorous for auditors, they are stringent for chief financial officers (CFO) as well. As a result CFO’s role would require a further increased focus on compliances with certain laws and rules. They should ensure sanity of financial information furnished to banks and ensure proper systems and processes to detect non-compliances or adverse financial position and to take corrective measures.

  Overall, changes as proposed under CARO 2020 will led to greater transparency and faith in the financial affairs of the companies. Moreover, these revisions to enhance reporting requirements are intended to bridge the expectation gap and will provide useful information to users about the underlying financial statements and the findings of the auditor. Auditors have essentially been compelled to demand more information which may make CARO 2020 a utilitarian move and the saying ‘A good auditor never makes mistakes’ will glow forever.

The writer is a tax specialist, financial adviser, guest faculty and public speaker based in Goa. He can be reached at panditgoa@gmail.com

Check Also

Vedanta Delisting: An opportunistic attempt

By Shivanand Pandit  Although delisting seems like converse thing to do considering the trouble of …