The Companies (Auditor’s Report) Order (CARO) is a guideline established by the Ministry of Corporate Affairs (MCA) under Section 143(11) of the Companies Act, 2013. The order mandates that auditors of certain types of corporations have to incorporate additional information in their audit reports than what the minimum reporting requirement in the Act requires. By requiring thorough disclosure of important financial and operational issues, including fixed assets, inventories, loans, statutory dues, fraud, and internal controls, CARO seeks to improve financial report credibility, accountability, and transparency. The framework is a significant tool for stakeholders, like investors, shareholders, lenders, and regulators, to assess the financial position, governance practices, and compliance of a company. The years have seen CARO evolve with CARO 2016 giving way to the more elaborate CARO 2020. This evolution is an indication of the government’s sustained endeavour towards better audit quality and corporate governance in India.
What is CARO 2020?
CARO 2020, officially the Companies (Auditor’s Report) Order, 2020, is a reporting requirement instituted by the Ministry of Corporate Affairs (MCA) under Section 143(11) of the Companies Act, 2013. It is used for financial statement audits of specified types of organisations and is intended to improve audit reporting quality and coverage.
CARO 2020 replaced CARO 2016 and became applicable for audits of financial years beginning on or after April 1, 2021.
The directive stipulates 21 definite provisions that auditors must report on, including property title deeds, inventory, loans, fraud, internal audit systems, compliance with CSR, and financial stability.
By creating higher levels of transparency, accountability, and the timely detection of financial irregularities, CARO 2020 helps enhance corporate governance.
This directive gives auditors greater responsibility for verifying and disclosing key financial and operational information, thus making financial statements more reliable and protecting stakeholders’ interests.
What is CARO 2016?
CARO 2016, or the Companies (Auditor’s Report) Order, 2016, was a statutory order laid down by the Ministry of Corporate Affairs (MCA) in terms of Section 143(11) of the Companies Act, 2013.
This directive required auditors for some types of organisations to report on extra elements in their audit reports. The overall purpose of CARO 2016 was to raise the quality, reliability, and transparency of financial statements by requiring auditors to cover 16 areas. These included fixed assets, inventory, loans and advances, statutory dues, internal controls, and cases of fraud.
The order covered most businesses with the exception of one-person companies, small firms, and banks or insurance companies. CARO 2016 expanded the coverage of statutory audits and made it possible for stakeholders to receive more informative and in-depth audit reports. In addition, it laid the groundwork for future improvements in audit reporting, which were expanded and strengthened later by CARO 2020.
Difference Between CARO 2020 and CARO 2016
The Companies (Auditor’s Report) Order, also known as CARO, is a rule-making directive of India’s Ministry of Corporate Affairs (MCA) that prescribes additional reporting by auditors of specific categories of firms. The main purpose of CARO is to increase the transparency and credibility of financial statements, reveal useful information to stakeholders, and help regulatory authorities in monitoring corporate governance.
CARO 2020 supersedes CARO 2016 and will be effective from the fiscal year 2021-22 (earlier it was to come into effect in the year 2020-21 but was delayed in view of the COVID-19 pandemic).
1. Clauses
- CARO 2016 had 16 clauses.
- CARO 2020 now has 21 provisions.
What has changed?
The addition of the number of provisions reflects the intent of the government to increase the audit reporting scope. CARO 2020 adds more requirements for CSR reporting, whistleblower complaints, internal audit systems, and material uncertainties that affect financial sustainability.
2. Fixed Assets and Property Title Deeds
- In CARO 2016, the auditors had to report on the fixed asset records of the company and carry out physical verification at regular intervals.
- In CARO 2020, there is a requirement for auditors to go one step further by ensuring that all title deeds of immovable properties are registered under the name of the company. In case this is not so, they have to give elaborate details, including whether the property has been registered in the names of promoters, directors, or third parties.
Why is this important?
This adds clarity to ownership and minimises the risk of real estate fraud held in someone else’s name.
3. Inventory Reporting
- CARO 2016 required auditors to report on physical inventory verification and material differences.
- CARO 2020 provides an additional level of detail: auditors must now note the extent and nature of the verification and whether discrepancies of 10% or more in aggregate for each class of inventory were noted.
What’s the effect?
This provides tighter control over the reporting of inventory and discourages inventory manipulation for overstated valuations.
4. Bank Working Capital Loans
- CARO 2016 did not address this issue.
- CARO 2020 adds a new requirement: auditors must check whether or not a company’s quarterly returns filed with banks are reconcilable with the financial records of the company.
Why is this relevant?
This is intended to discourage companies from declaring exaggerated stock or receivable values to obtain increased loan limits, a typical fraudulent practice.
5. Loans, Advances, Guarantees, and Investments
- In CARO 2016, there is a requirement to report loan and guarantee agreements that can compromise the interests of companies.
- CARO 2020 covers loans given to related parties, unfavourable terms and conditions of loans, repayment on time, and overdue loans.
What are the improvements made?
There is increased transparency in related-party transactions, thereby enhancing confidence in the recoverability of loans.
6. Fraud Reporting
- CARO 2016 had mandated reporting of any fraud seen or reported during the year.
- CARO 2020 adds one more mandate: when the auditor has filed a report to the Central Government under Section 143(12) on Form ADT-4 in the case of suspected fraud.
Why did the addition occur?
It puts more responsibility on the auditor to report cases of fraud instead of just mentioning them in an audit report.
7. Whistle-Blower Complaints
- CARO 2016 did not have such a provision.
- CARO 2020 mandates auditors to report whether whistle-blower complaints were received during the year and how the company handled them.
Significance:
This adds corporate ethics and protects whistle-blowers, acting as a warning against unethical practices.
8. Internal Audit System
- This was not covered in CARO 2016.
- CARO 2020 adds a new requirement: auditors have to evaluate if the company has an adequate internal audit system for the size and complexity of its operations, and if the reports of internal auditors are considered.
Effect:
This enhances the need for a strong system of internal control and ensures internal audits are not cosmetic.
9. Cash Losses
- CARO 2016 lacked this paragraph.
- CARO 2020 mandates the auditor to report whether the company made cash losses during the current and the last year.
Why is that important?
Cash losses are an indicator of financial distress. This provision provides stakeholders with early indications of financial health.
10. Statutory Auditors’ Resignation
- Not covered under CARO 2016.
- Under CARO 2020, the new auditor must disclose when a statutory auditor has resigned, whether the previous auditor had any issues and if they were considered before the audit was accepted.
Aim:
This provision discourages companies from “auditor shopping” and holds the previous auditor responsible in the event of abrupt resignations.
11. Material Uncertainty Regarding Financial Stability
- CARO 2016 did not prescribe such disclosures.
- CARO 2020 makes the auditor explicitly report on the ability of the company to settle its current liabilities within a period of one year from the date of the balance sheet.
Significance:
This gives a categorical opinion on the financial health of the company and acts as a going-concern indicator.
12. Corporate Social Responsibility (CSR)
- CARO 2016 did not make any reporting requirements for CSR.
- CARO 2020 brings a special requirement to determine if the company has complied with CSR expenditure requisites under Section 135, and if any unspent amounts are transferred to the earmarked fund or account.
Importance:
It promotes transparency and accountability in the social responsibility expenditure.
13. Benami Property Deals
- Not mandated under CARO 2016.
- Should any actions be launched against the business under the Benami Transactions (Prohibition) Act, CARO 2020 demands reporting.
Intent:
This encourages holding assets in the name of made-up people and strengthens anticorruption initiatives.
14. Group Audits / Consolidated Financial Statements
- No mention in CARO 2016.
- CARO 2020 includes a requirement for holding company auditors to disclose any qualifications or negative observations arising out of the audit reports of the subsidiary, associate, or joint venture companies forming part of the consolidated financial statements.
Reason for inclusion:
This gives a complete picture of the group’s financial well-being and detects possible risks emanating from subsidiaries or associates.
Conclusion
CARO 2020 represents a valuable improvement over CARO 2016 in the extent and depth of audit reporting. CARO 2016 established a good starting point for enhanced audit disclosures, and CARO 2020 improves on it by introducing more extensive, detailed, and risk-based reporting requirements. CARO 2020 demands more from auditors, inviting them to go beyond checking general compliance and critically examine the financial and operating integrity of the firm. The amendments are consistent with best practices in the world and reflect India’s increasing focus on corporate discipline and moral behaviour. CARO 2020, in short, is a proactive regulatory step that enhances the corporate governance framework, enhances the audit climate, and enhances the quality of financial reporting in India.
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