CARO 2020-Key Changes and Disclosure Requirements

CARO 2020 is a new system for the release of audit reports in the event of a statutory corporate audit under the Companies Act, 2013. The additional requirements of reporting following the National Financial Reporting Authority (NFRA) have been included through CARO 2020. The NFRA is an independent governing body to oversee the audit and accounting work in India. The purpose of CARO 2020 is to improve the overall quality of reporting for corporate auditors. This article will analyze the changes in CARO 2020.

Key Abstract

In exercise of the powers conferred by sub-section (11) of section 143 of the Companies Act, 2013, (Act), the Central Government issued the Companies (Auditor’s Report) Order, 2020, (CARO 2020/Order) vide Order number S.O. 849(E) dated 25th February 2020, and was subsequently amended vide number S.O. 1219 (E) dated 24th March 2020, and was again amended vide number S.O. 4588 (E) dated 17 Following consultations with the National Financial Reporting Authority, CARO 2020 has included additional reporting requirements (NFRA).

The National Financial Reporting Agency (NFRA) is an independent regulatory body established under Section 132 of the Companies Act, 2013, to regulate the audit and accounting profession in India. CARO 2020 aims to improve the overall quality of reporting by company auditors.

Application of CARO 2020 

The launch of CARO 2020 has been postponed to FY 2021-2022 due to the COVID-19 emergency. All companies that were covered by CARO 2016 are under the order. There are some exceptions to this order:

• One-Person Company
• Insurance agencies
• Banking associations
• Small corporations (Companies with a minimum wage or equal to Rs 50 lakh and the latest reported profit of less than or equal to Rs 2 crore are eligible)
• Section 8 Companies

Some private companies are exempted from the requirements of CARO, 2020:

• Whose gross amount of receipts or income (including revenue from discontinued activities) in the current financial year or less than Rs 10 crore;
• Whose budget paid and the savings from a balance date of less than or equal to Rs 1 crore (i.e., usually at the end of FY);
• It is not a public company or a subsidiary; and
• At any time during the financial year, borrowings under or equal to Rs 1 crore.

Objective of CARO 2020

The goal of the CARO 2020 Order is to increase the overall quality of reporting by company auditors. This order is a step towards strengthening the corporate governance framework. These changes are necessary and tighten the auditor’s reporting requirements. Therefore, company management must be aware of the additional details that the auditor needs to sign off on the reporting framework.

Measures to ensure smooth compliance with CARO, 2020 Audit

The following are the measures to ensure smooth compliance with CARO, 2020 Audit:

• The quantity and value of inventory reported quarterly to the creditor bank must match the inventory shown on the books.
• The repayment schedule of the loan must be respected in time according to the terms of the contract. A small failure of the borrower can result in the qualification of the auditor.

CARO 2020 and Consolidated Financial Statements

CARO 2016 did not apply to the consolidated financial statements. However, CARO 2020 contains a provision that now applies to the reporting of consolidated financial statements. According to this provision, where the auditors highlight any adverse remarks or reservations in the CARO reports of the respective separate companies, the details of such remarks should be given by the auditors of the companies in their CARO reports on the consolidated financial statements.

Key changes in CARO 2020

• Property Plant and Equipment (PPE) reporting and intangible assets:  Changes w.r.t in CARO, 2016
  • CARO 2020 provided separate reporting of PPE and Intangible assets while the previous order included both under fixed assets.
  • Reporting of deeds, where the company is an employer and where a lease agreement is in favor of the inspector has been suspended.
  • Specific details are required when deeds are not in the name of a company.
    
    New added clauses
    • Accurate reporting of PPE reviews is required
    • Direct reporting on any initiated / pending action against the Company for seizing ‘Benami assets’ under the Benami Transactions (Prohibition) Act, 1988.

• Inventory Reporting: There have been significant changes in this clause. Initially, the auditor was required to report only if the asset verification had been carried out on time by management and if any material conflicts had been identified, and, if so, whether they had been properly handled in the literature.The Auditor-General must now report on the following: –
  • Whether the installation and the physician certification process by management is appropriate or not
  • Whether there was a discrepancy of 10% or more in the measurement of each category of inventory has been noted and if so, whether it has been properly addressed in the literature.
  • If at any time the company has approved operating limits of more than Rs 5 crore, banks or FI’s based on current asset security,

Then the auditor must ensure that the quarterly returns/statements submitted by the company with those banks or FIs are consistent with the documents.

If the same does not match, the same details will be provided.

• Loan Reporting, Investment, Guarantees, Bonds, and advances in the form of loans: Significant changes to clause 3 are that the reporting has been extended to include loans, investments, guarantees, securities, and advanced loans in the form of loans to any entity where the loan to parties only under section 189, was covered.The new clauses include the following: 
  • That the terms and conditions of the loan/investment/guarantees/securities/development do not affect the interest of the company
  • Concerning loans and natural development of the type of loan, whether the principal’s payment schedule and interest are set and whether payments or receipts are standard.
  • Additional loan report and development in the form of a renewed/extended or new loan provided for repayment of an existing loan
  • Additional credit report and developments in the form of loan repayments on-demand or without specifying any terms or conditions for repayment.
  • Additional statement of aggregate value during the year and balance due date balance in respect of loans or liabilities and guarantees or collateral to subsidiaries, joint ventures, and partners.

• No changes have been made to clause iv which deals with reporting compliance with Sections 185 and 186.

• Deposit Reporting: An additional report on the amounts considered as a deposit was also added by CARO 2020 to clear the ambiguity.

• There was no change w.r.t. clause vi (Reporting on Cost Record)

• Reporting on Statutory Dues: Amendment to drafting to include GST on the required statutory dues and disputes for all statutory dues are included.

• Unrecorded Income Reporting: Clause 8 requires auditors to report whether previously unrecorded income has been refunded or disclosed as income during the year in the tax assessment under the Income Tax Act, 1961, duly recorded in the books during the year.

• Repayment and Usage Borrowing Reporting: The default interest payment is now included. Other information required is on the following: –
  • whether the company is a bank, FI, or other lenders that has been declared a non-payer
  • If the loan is not included for the purpose for which it was obtained, the amount of the loan deviated, and the intended deviation will be disclosed.
  • If short-term funds are used for long-term purposes, then the same type and amount will be shown.
  • Details of the loans to the holding company to fulfill the corporate business obligations will be disclosed.
  • If the loan is increased during the year for the securities of its companies, your details will be disclosed and the details of the default if the company fails to repay the loan.

• Reporting on money raised use of your shares: The additional requirements of Section 62 of the Companies Act must be complied with in the event of a preferential allotment or private placement.

• Fraud Reporting: Additional clauses have been added, which require reporting: –
  • Any report under section 143 (12) of the Companies Act submitted by auditors on Form ADT-4 to the Central Government
  • Whether the auditor has considered reporting complaints, if any, received by the company during the year.

• Nidhi Company Reporting: An additional clause is included, which requires reporting on the failure to pay interest on the deposit or refund period at any time and the details thereof.

• There was no change w.r.t Section xiii relating to related party transaction reporting

• Internal Audit Reporting: This clause requires auditors to report: –
  • The company has an internal audit plan commensurate with the size and nature of its business
  • The Internal Audit reports for the period under review have been reviewed by an official auditor

• There was no change w.r.t clause xv clause relating to non-cash transaction reporting with directors

• Reporting Registration under Section 45 IA of the RBI Act: Additional clauses have been added, which require reporting: –
  • Whether non-banking financial transactions or real estate transactions are performed without a valid registration certificate from the RBI
  • Whether the company is a Core Investment Company (CIC), it complies with the separation criteria set by the RBI
  • If a group has more than one CIC as part of the Group, the number of CICs that are part of the Group will be disclosed.

• Financial Loss Reporting: Clause xvii requires auditors to report whether a company has lost money in the financial year and the preceding financial year immediately and if so, the amount lost should be disclosed.

• Auditor’s Resignation Report: This new clause requires reporting on: –
  • Cancellation of official auditors during the year, if any
  • Of the issues, objections, or complaints raised by the outgoing auditors have been considered.

• Financial Statement Reporting: A new clause has been inserted in CARO 2020, which requires the auditor to report on the uncertainty of assets. Disclosure is required if the auditor believes that the company can meet its current liabilities by the balance sheet date as they are payable within 1 year.

• Reporting on CSR compliance: A new clause has been inserted in CARO 2020, which requires the auditor to report that the amount of unused CSR has been transferred to: –
  • Fund as set out in Schedule VII (where no specific project has been created or allocated), or
  • Special bank account (related to any ongoing project)

• Consolidated Financial Statement (CFS) Reporting: The previous order did not apply to the auditor’s report on the consolidated financial statements.
  However, in terms of CARO 2020, it is necessary to disclose whether there have been qualifications or dissenting auditors in the CARO reports for companies included in the consolidated financial statements.

Final words

The amendment to the CARO has brought about significant changes, which have led to a strong and cautious approach to the Auditor-General’s reporting quality. Priority is given to the efficiency and effectiveness of Internal Control, continuous assumptions, supplier policies, and risk mitigation strategies acquired by management. “The Cost of non-compliance is more than the Cost of Compliance” – This is true for new India, as the Indian economy continues to promote transparency through additional measures of governance. Thus all the changes in CARO 2020 have been discussed in this article.

Need an expert opinion on this topic? Connect to Legal Window for the expert consultation.