On June 26, 2023, the National Financial Reporting Authority of India (NFRA) issued a reminder to statutory auditors in India, emphasising their legal obligation to report any instances of fraud “against the company by its officers or employees,” amounting to one crore rupees or more (approximately $120,000), to the Indian Central Government. This decree clarifies the scope of the duty of auditors in India to recognise and report fraudulent activity conducted by a company’s officers or employees within its jurisdiction. Read more here.
Given the significance of this regulatory action, internal investigations in India are expected to experience substantial changes. A few key considerations are essential.
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Firstly, an increased level of diligence is necessary when conducting internal investigations in the face of the recent regulatory circular. Auditors must diligently identify and act upon instances of fraud,
which could ultimately protect them from potential legal or disciplinary actions if they fail to report such instances. -
Secondly, ‘reasonable suspicion’ of fraudulent activity should be taken seriously. The phrase “reason to believe” described by the NFRA implies a lower threshold, but it establishes that auditors are not required to confirm the presence of fraud before reporting; mere suspicion is sufficient.
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Finally, auditors should ensure that they do not potentially breach any laws or violate any rights when conducting investigations—particularly with respect to the protection of sensitive company information and the rights of employees under both Indian law and the company’s internal policies. This is especially important given the potential severity of the penalty for non-compliance.
In conclusion, this move by the NFRA is poised to bring greater transparency and accountability into the auditing process in India. The imminent changes in the regulatory landscape should hold auditors to a higher standard while protecting the financial health of companies and the rights of their employees in India.