Changes in the Fraud Reporting Mechanism Under the Companies (Amendment) Act, 2015

[The following guest
post is contributed by Suprotik Das,
a 4th year law student at the Jindal Global Law School, Sonepat, Haryana.]
The Companies (Amendment) Act, 2015 is a harbinger of positive trends in the
ease of doing business for Indian companies. This post is specifically with
regard to Section 143 of the Companies Act, 2013 concerning the power and
duties of auditors and its amendment thereof. 
Section 143(12) of the 2013 Act previously read:
Notwithstanding anything contained
in this section, if an auditor of a company, in the course of the performance
of his duties as auditor, has reason to believe that an offence involving fraud
is being or has been committed against the company by officers or employees of
the company, he shall immediately report the matter to the Central Government
within such time and in such manner as may be prescribed.
Now, Section 13 of the Amended Act states that:
“Notwithstanding anything contained
in this section, if an auditor of a company in the course of the performance of
his duties as auditor, has reason to believe that an offence of fraud involving
such amount or amounts as may be prescribed, is being or has been
committed in the company by its officers or employees, the auditor shall report
the matter to the Central Government within such time and in such manner as may
be prescribed:
Provided that in case of a fraud
involving lesser than the specified amount, the auditor shall report the matter
to the audit committee constituted under section 177 or to the Board in other
cases within such time and in such manner as may be prescribed.”
There are some key points that I would like to highlight with regard to
this amendment:
1. Materiality of
– The amended section 143(12) speaks of a threshold limit (yet to be
notified), wherein fraud involving amounts above the threshold limit will be
reported to the Central Government and amounts lower than the threshold limit
will be reported to the Audit Committee under S. 177.
With regard to fraud materiality, there has been some
development in the United States. In Amgen Inc. v. Connecticut
Retirement Plans & Trust Funds
,[1] the
Supreme Court stated that a plaintiff is not required to prove the materiality
of fraud/misrepresentation in order to obtain class certification. Class certification
is a process by which a certain set of people are grouped together as a ‘class’
for the purpose of a class action suit under Rule 23 of the Federal Rules of
Civil Procedure. This ruling will greatly benefit plaintiffs in the United
2. Bifurcation in
fraud – Internally to
the Audit Committee and externally to the Central Government. However, this is
applicable only to auditors.
3. With regard to
internal and external whistleblowing by employees
(a) For an
employee in a company, there is still no demarcation as to when they are to
report fraud internally and externally. The law still mandates reporting fraud
to the Audit Committee with a stringent whistleblower policy in place. However,
the execution and implementation of this aspect remains flawed due to the lack
of protection to ensure anonymity for employees.
(b) The Ministry
of Corporate Affairs (MCA) should ensure that it specifies rules dealing with
the instances and threshold limits, which would guide an employee as to when to
report fraud via the internal or external route. This procedure should be
captured in the company’s whistleblower policy and adequate safeguards should
be included to protect and preserve the anonymity of the employee.
(c) This dual
procedure of an internal route vis-à-vis an external route of reporting fraud
would provide greater clarity as to what exactly constitutes a ‘genuine
concern’ under S. 177(9) of the Companies Act.
(d) There should
also be safeguards that address conflict of interest issues such as when the
internal route is biased, or when a member of the audit committee is being
accused of fraud.
The present scenario of whistleblowing in India is quite ambiguous and
there exists a number of inconsistencies within the Act. Just as the Parliament
has started this dual approach to reporting fraud keeping in mind the
materiality and substantiality of the amount involved with regard to Auditors,
the MCA should notify rules which guide employees of a company when to report
fraud internally and externally.
It will be interesting to see how fraud reporting pans out in India and
whether reporting increases of decreases, especially after the new materiality
– Suprotik Das

[1] No. 11-1085, 2013 WL

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

1 comment

    The 'materiality requirement' dwelt upon, whether of auditors (or as-canvassed-for, of whistle blowers)is, prima facie,such an obviously nebulous, highly impracticable concept,as to be expected to make any sense or serve any useful purpose.If were to be probed into,it is bound to be realized that,even if he were an auditor howsoever shrewd or ideally equipped with 'professionalism' of a reasonable order -rarely come-by though, to make a clear apprisal of and come to a definitive conclusion as to what is material or not in a given situation is too difficult , nay well nigh impossible; as viewed, the reason is that,the basic exercise that entails suffers from the malady of , – 'subjectivity' and the inevitable consequence of human trait/tendency to be 'judgmental'.

    In short, each one of the related concepts,- crude but being far from foolproof or safe-proof, is amenable to being individualistically understood and interpreted in a sense mutually differing and widely at variance.

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