CARO 2020 Changes

In a press statement issued on Wednesday, the corporate affairs ministry said it had notified the Companies (Auditor’s Report) Order, 2020, (CARO) on Tuesday to enhance due diligence and disclosures by auditors and bring greater transparency into the financial affairs of companies.

The rules will apply to audit reports for the financial years commencing on or after April 1, 2019

The key changes can be summarized as follows

1) Expanding the scope of audits beyond their current limits, auditors will now also have to specify the aggregate amount of loans taken without any terms for repayment, their percentage to total loans granted, and loans granted to promoters and related parties.

2) The clauses of CARO 2016 have been 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

3) 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

4) 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.

5) 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.

6) 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

7) To keep the evergreening of loans in check, auditors will have to file disclosures on whether the company has taken funds from any entity to meet the obligations of its subsidiaries or joint ventures and if it has raised loans during the year on the pledge of securities held in such entities.

8) Auditors will also report if the company is a declared wilful defaulter by any bank or financial institution and consider the issues, objections or concerns raised by the outgoing auditors before forming an opinion

9) All statutory dues that have not been deposited on account of any pending dispute are also required to be disclosed

10) The auditor has to provide specific details of whether the company has been sanctioned working capital limits in excess of Rs 5 crore from banks or financial institutions on the basis of security of current assets

11) Discrepancies of 10 per cent or more in the aggregate of each class of inventory noticed during physical verification of inventory would have to be reported.

12) To reduce the manipulation of books, auditors will have to verify if quarterly statements filed with such banks are in agreement with the books of accounts

13) Whether any transactions not recorded in the books of account have been surrendered or disclosed as income during the year in the tax assessments under the Income Tax Act

14) Auditor to certify whether term loans were applied for the purpose for which the loans were obtained; if not, the amount of loan so diverted and the purpose for which it is used may be reported