Question

Izzah is an auditor of Somuda Bhd. While doing an audit on the company, she discovered that one of the directors, Sebastian had committed fraud against the company. She then sent a report to the Registrar of Companies about the fraud. Sebastian found out about this and has now threatened to sue Izzah for defamation.
Will Sebastian succeed in his action?

According tu Companies Act 2016

Answer 1

No, Sebastian would not succeed in his actions.

As per Section 143(12) of the Companies Act 2013 read with the Companies (Audit and Auditors) Amendment Rules, 2015 the provisions relating to reporting of fraud by auditor is as follows:

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:

Provided further that the companies, whose auditors have reported frauds under this sub-section to the audit committee or the Board but not reported to the Central Government, shall disclose the details about such frauds in the Board’s report in such manner as may be prescribed.”

Explanation : If an auditor of a company, in the course of the performance of his duties as auditor, has sufficient 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 report the matter in the manner stated hereinafter.

No duty to which an auditor of a company may be subject to shall be regarded as having been contravened by reason of his reporting the matter as referred above if it is done in good faith.

Penalty for failure to disclose fraud;

As per Section 143(12), an Auditor is duty bound that if in the course of the performance of his duties as auditor, he 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. In case of any failure on his part to comply with this duty, he shall be punishable with fine which shall not be less than Rs.1,00,000/- but which may extend to Rs.25,00,000/-.

Therefore, in the given senario , it was a legal duty to report fraud done by Sebastian, which she discovered in the course of audit. The inability to do so would make her liable to penalty given in Section 143 of the Act