In the world of corporate governance and financial transparency, the Companies (Auditor's Report) Order, 2020, abbreviated as CARO, holds significant importance.
CARO, issued by the Ministry of Corporate Affairs, Government of India, mandates certain requirements for the format and content of the auditor's report for companies. This order aims to enhance the quality and reliability of financial reporting, ensuring accountability and trust in the corporate sector.
Let’s understand CARO in detail.
Background of CARO
The Companies (Auditor's Report) Order traces its origins back to 1975 when it was first introduced to bring uniformity and standardization in the auditor's reporting across companies.
Over the years, it has undergone several revisions to keep pace with the evolving regulatory landscape and address emerging issues in corporate governance.
CARO 2020 introduces a fresh framework for issuing audit reports for statutory audits conducted under the Companies Act, 2013.
Following discussions with the National Financial Reporting Authority (NFRA), CARO 2020 has incorporated supplementary reporting obligations. NFRA functions as an autonomous regulatory entity overseeing the audit and accounting sectors in India.
The primary objective of CARO 2020 is to elevate the standard of reporting provided by company auditors, thereby aiming to strengthen overall reporting quality.
Applicability and Scope of CARO 2020
CARO 2020 applies to all companies in India, including private and public companies, except those specifically exempted by the government.
It covers various aspects such as internal controls, compliance with laws, financial performance, and corporate governance practices.
The order categorizes reporting requirements into different sections, each focusing on specific areas of scrutiny.
However, the scope of CARO 2020 excludes the following categories of companies:
- One Person Company.
- Small companies, defined as those with paid-up capital equal to or less than Rs 4 crore and a last reported turnover equal to or less than Rs 40 crore.
- Banking companies.
- Companies registered for charitable purposes.
- Insurance companies.
Moreover, private companies meeting the following criteria are exempt from the CARO 2020 requirements if they meet the following criteria:
- Their gross receipts or revenue (including revenue from discontinuing operations) is equal to or less than Rs 10 crore in the financial year.
- Their paid-up share capital plus reserves is equal to or less than Rs 1 crore as on the balance sheet date (typically at the end of the financial year).
- They are not a holding or subsidiary of a Public company.
- Their borrowings are equal to or less than Rs 1 crore at any time during the financial year.
Also Read: How to Avoid Legal Liabilities as an Auditor under the Companies Act 2013
Key Reporting Requirements Under CARO 2020
Under CARO 2020, auditors are required to report on various parameters such as the company's internal controls, compliance with statutory provisions, default in loan repayments, utilization of funds raised through public issues or loans, and the existence of related party transactions.
CARO 2020 Reporting Requirements:
- Assets: Details of tangible and intangible assets.
- Inventory and Working Capital: Disclosure of inventory and working capital details.
- Investments and Loans: Information on investments, guarantees, securities, advances, and loans.
- Compliance: Adherence to loan agreements with directors and compliance regarding accepted deposits.
- Costing Records: Maintenance of cost records.
- Statutory Liabilities: Deposit of statutory liabilities.
- Unrecorded Income: Reporting unrecorded income.
- Borrowings: Identification of defaults in loan repayments.
- Fund Utilization: Details of funds raised and their utilization.
- Fraud and Whistleblower Complaints: Reporting on fraud incidents and whistleblower complaints.
- Nidhi Compliance: Compliance with Nidhi company regulations.
- Related Party Transactions: Disclosure of transactions with related parties.
- Internal Audit: Review of the internal audit system.
- Non-cash Transactions with Directors: Reporting non-cash transactions involving directors.
- RBI Act Compliance: Registration under section 45-IA of the RBI Act, 1934.
- Cash Losses: Identification of cash losses.
- Auditor Resignation: Reporting resignation of statutory auditors.
- Liabilities Uncertainty: Assessing material uncertainty regarding meeting liabilities.
- Schedule VII Fund Transfer: Transfer to funds specified under Schedule VII of the Companies Act, 2013.
- Group Companies' Auditor Remarks: Reporting qualifications or adverse remarks from auditors in other group companies.
If the auditor provides an unfavorable or negative response to any requirement, then the report must detail the basis for such a response. Similarly, if the auditor cannot express an opinion on any matter, the report should explain the reasons for the inability to do so.
Impact on Corporate Governance
The implementation of CARO has significantly enhanced transparency and accountability in corporate reporting.
By mandating comprehensive disclosures, the order enables stakeholders to make informed decisions about the financial health and performance of companies.
It also serves as a deterrent against financial mismanagement and fraudulent practices.
Challenges and Future Outlook
While CARO 2020 aims to bolster corporate governance, its implementation poses challenges for companies and auditors alike.
Compliance with the extensive reporting requirements can be resource-intensive and time-consuming. Moreover, the order may require periodic revisions to address emerging issues and align with international best practices.
The Companies (Auditor's Report) Order, 2020, plays a crucial role in promoting transparency and accountability in the corporate sector.
Also Read: Understanding Audit Trail under the Companies Act, 2013
The Bottom Line
By setting forth standardized reporting requirements, CARO enhances the reliability of financial statements and fosters investor confidence.
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