Ministry of corporate affairs to notify threshold and rules for flagging corporate frauds

Auditors of companies may soon be required to alert the authorities in case of any fraud involving a sum of at least Rs 1 crore or 10% of a company's turnover. This mandatory reporting is part of an early warning system being put in place by the government to prevent recurrence of a Satyamlike accounting scam.

The MCA is likely to notify by the end of this month the threshold and the rules for flagging corporate frauds to the government, an official said.

"The norms are being finalised," the official said, requesting not to be identified. The expected threshold is in line with the framework suggested by the Institute of Charted Accountants of India (ICAI). The concept of fraud reporting was introduced in the Companies Act ,2013, implemented from April 2014. However, the government has so far not notified monetary threshold or rules for reporting.

"ICAI had asked the government that the concept of materiality and some threshold limit should be the criteria for reporting," said ICAI president ManoFadnis. A reasonable threshold was one of the key concerns of ICAI as the earlier provision would have mandated that even a fraud of Rs 10 be reported to the central government, Fadnis added.

A recent joint study conducted by industry body Assocham and Grant Thornton India said there was a 45% increase in corporate frauds in the country over the past two years. In order to correct the anomaly, the government moved the amendments to the Companies Act.

The amendments bill was passed by Parliament in the last session. The government has brought in the concept of materiality and a threshold for reporting by auditors. Any fraud below the threshold limit will have to be reported to company's audit committee and its board. ICAI has already issued a guidance note in this regard.

In addition to statutory auditors, the reporting responsibilities under the Companies Act apply to cost accountants conducting a cost audit as well as company secretaries conducting secretarial audit if they have reason to believe there is fraud or suspected fraud during the course of performance of duties as auditor.

The multi-crore rupee Satyam  fraud, the largest corporate scam in India, would have come to light much before had the auditors flagged it to the government or company's board.

The company created false invoices to inflate cash balances that appeared to double the value of the company's assets from 2005 to 2009. The Centre found that PWC India the company's auditors, neglected the issue in the discharge of duties and failed to verify cash balances in Satyam's bank accounts.