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A Detailed Analysis of CARO 2020 vs. CARO 2016

This article is primarily intended to highlight the differences between CARO 2020 and CARO 2016. CARO 2020 stands for Companies (Auditor’s Report) Order, 2020. Section 143 of the Companies Act, 2013 states that auditors are mandated to report on the matters entailed in CARO. CARO is an order which lists down the matters deemed necessary by the Ministry of Corporate Affairs (MCA) on which the auditors are required to comment in their audit reports.

CARO was implemented to drive forward the MCA’s objective that the financial statements of certain entities must be accompanied by reports on some material issues as opined by the auditors. The auditors of companies on which CARO is applicable are required to comment on the clauses enumerated in the CARO order after performing necessary audit procedures for verification. CARO 2020 has been issued in the supersession of CARO 2016.

Differences between CARO 2016 and CARO 2020

The matters subsumed in CARO 2020 are shown in the below-mentioned sections in comparison to the matters covered in CARO 2016:

Effective date

CARO 2016	CARO 2020
CARO 2016 was applicable from the financial year 2015-16.	CARO 2020 has superseded CARO 2016 and is applicable from the financial year 2019-20.

Applicability of CARO

CARO 2016: It is applicable to all companies (including foreign company), except:

1. Banking & Insurance companies;

2. Company registered u/s 8 of the Companies Act, 2013;

3. One Person Company and small company;

4. A Private Ltd. Company:

• Not a subsidiary or holding company of a public company;
• Paid-up capital + R & S not exceeding Rs. 1 crore as on the balance sheet date;
• Borrowings not exceeding Rs. 1 crore from any bank or financial institution at any time during the FY; and
• Revenue (including revenue from discontinuing operations) not exceeding Rs. 10 crore in the FY.

CARO 2020: CARO 2020 has superseded CARO 2016 and is applicable from the financial year 2019-20. The applicability is same as CARO 2016.

Note: CARO 2016 was not applicable to consolidated financial statements. However, CARO 2020 comprises a clause which is now applicable to auditor’s report on CFS.According to this clause, where any qualifications or adverse remarks are highlighted by the auditors in their respective standalone companies’ CARO reports, then the details of such remarks are to be mentioned by the auditor of the company in his CARO report of CFS.

Paragraphs: Modified (The matters to be reported by the auditors are those as contained in Paragraphs 3 and 4 of CARO.)

CARO 2016	CARO 2020
CARO 2016 comprises 16 reporting clauses in Paragraph 3.	CARO 2020 comprises 21 reporting clauses in Paragraph 3.

Reporting on Fixed Assets: Modified

CARO 2016 focuses on reporting requirements of all fixed assets.

1. Maintenance of proper records including details of quantity and situation of FA
2. Physical verification at regular intervals by the management
3. Material discrepancies accounted for in the books of account
4. Title deeds of immovable property, if not held in the name of the company

CARO 2020 accords more focus on Property, Plant, Equipment (PPE) and intangible assets (in parlance with the terminology of IND-AS).

1. Maintenance of proper records including details of quantity and situation of PPE
2. Maintenance of proper records of intangibles
3. Physical verification at regular intervals by the management
4. Material discrepancies accounted for in the books of account
5. Title deeds of immovable property, if not held in the name of the company – Format prescribed (*Refer Note A)
6. Revaluation of PPE if done by a Registered Valuer; and if the amount of change is >= 10% of net carrying value

Reporting on Benami Transactions: Inserted

CARO 2016	CARO 2020
None	Details of any proceedings pending under the Benami Transactions (Prohibition) Act, 1988 against the company; and its appropriate disclosure in FS

Reporting on Working capital: Inserted

CARO 2016	CARO 2020
None	1. If sanctioned working capital limits in excess of Rs. 5 crore from banks or financial institutions on hypothecation of current assets
None	2. If quarterly returns filed with banks or financial institutions are in conformity with books

Reporting on Investments, loans and advances given: Modified

CARO 2016:

1. The terms and conditions of loans are not prejudicial to the interests of company
2. Whether the repayment is in order
3. Loans outstanding for more than 90 days and their recovery position
4. Whether Sections 185 and 186 of the Companies Act have been complied with 

CARO 2020:

1. Proper disclosure of investments, granting of guarantee or security, and providing of loans or advances
2. Disclosure of aggregate amounts during the year and O/S balances of loans to subsidiaries, joint ventures and associates
3. Disclosure of aggregate amounts during the year and O/S balances of loans to parties other than subsidiaries, joint ventures and associates
4. The terms and conditions of loans are not prejudicial to the interests of company
5. Whether the repayment is in order
6. Loans outstanding for more than 90 days and their recovery position
7. Whether Sections 185 and 186 of the Companies Act have been complied with 
8. In case of loans or advances repayable on demand, without any terms or period of payment, specify the amount of such loans given to the promoters & related parties
9. In case existing loans falling due during the year have been extended, renewed, replaced with fresh loans, specify the aggregate amount and percentage of such loans

Reporting on deposits: Modified

CARO 2016	CARO 2020
1. For deposits accepted by the company, whether RBI’s directives and Sections 73 to 76 have been followed	1. For deposits accepted by the company or deemed deposits, whether RBI’s directives and Sections 73 to 76 have been followed
2. If an order is passed by the court or any other tribunal like RBI, CLB, NCLT, etc.	2. If an order is passed by the court or any other tribunal like RBI, CLB, NCLT, etc.
3. Whether any non-compliance is noticed and specify the nature of contravention	3. Whether any non-compliance is noticed and specify the nature of contravention

Reporting on Transactions not recorded: Inserted

CARO 2016	CARO 2020
None	1. Are there any transactions not recorded in the books of account but disclosed as income in the income tax proceedings/assessments
None	2.  Proper disclosure of such unrecorded transactions has been done or not

Reporting on Defaults in repayment: Modified

CARO 2016:

1. The details of period and amount of default in respect of repayment of loans or borrowings to banks, financial institutions, Government or debenture holders

CARO 2020:

1. The details of period and amount of default in respect of repayment of loans or borrowings to banks, financial institutions, Government or debenture holders
2. Format specified for showing lender-wise details of default (**Refer Note B)
3. Whether the company is declared as a willful defaulter by a lender
4. Whether terms loans/short-term loans are applied for the purpose for which they were obtained; with details of diversion, if any
5. Details of funds procured by the company to meet the obligations of subsidiaries, joint ventures and associates
6. Whether the company has raised loans on the pledge of securities held in subsidiaries, joint ventures and associates

Reporting on Whistle-blower complaints: Inserted

CARO 2016	CARO 2020
None	Whistle-blower complaints received by the company during the year; to be considered by the auditor while submitting his audit report

Reporting on Internal audit: Inserted

CARO 2016	CARO 2020
None	1. The company’s internal audit system is commensurate with the size and nature of its business or not
None	2. Whether the statutory auditor has considered the internal audit reports of the company

Reporting on Cash losses: Inserted

CARO 2016	CARO 2020
None	1. Cash losses incurred by the company in the current FY and in the preceding FY
None	2.  The amount of cash losses/negative balance reflecting in cash flow statement

Reporting on Resignation of statutory auditors: Inserted

CARO 2016	CARO 2020
None	1. Any resignation of the statutory auditor during the year
None	2. Whether details of issues, objections or concerns raised by the outgoing auditors have been appropriately considered

Reporting on Uncertainty to meet liabilities: Inserted           

CARO 2016	CARO 2020
None	1. Details of material uncertainty with regard to realization of financial assets and payment of financial liabilities
None	2. Whether any such uncertainty exists on the date of audit report that the company will not be capable of meeting its liabilities as and when they fall due within a period of 1 year from the B/S date

Reporting on CSR: Inserted

CARO 2016	CARO 2020
None	1. In relation to ongoing CSR projects, details of transfer of unspent CSR amount to the Special Account within stipulated time in compliance with Section 135
None	2. For CSR projects other than ongoing ones, details of transfer of unspent CSR amount to the Fund specified in Schedule VII within stipulated time in compliance with Section 135

Reporting on Inventory: Modified

CARO 2016	CARO 2020
1. Physical verification at regular intervals by the management	1. Physical verification at regular intervals by the management
2. Material discrepancies accounted for in the books of account	2. Material discrepancies accounted for in the books of account
None	3. Materiality is considered to be 10% or more for inventory items

Reporting on Statutory Dues: No change

CARO 2016:

1. The company is regularly depositing its statutory dues with authorities such as ESI, Provident Fund, Income Tax, etc.
2. If not regular, statutory dues outstanding for more than 6 months as on the last date of the FY should be disclosed
3. If any taxes have not been deposited because of any pending dispute, disclosure on the amount of such dispute and the forum where the litigation is ongoing

CARO 2020: Same provisions as CARO 2016.

Reporting on Fraud: Modified

CARO 2016	CARO 2020
1. Any fraud by the company or its officers/employees which has been noticed during the FY	1. Any fraud by the company or its officers/employees which has been noticed during the FY
2. The nature and amount of fraud involved	2. The nature and amount of fraud involved
None	3. Whether any report in FORM ADT-4 has been filed by the auditor with the Central Government in relation to suspected offense

Cost Records: No change

CARO 2016	CARO 2020
If maintenance of cost records is specified by the Central Government u/s 148 of the Companies Act 2013, whether such accounts and cost records have been maintained or not by the company	Same as CARO 2016.

Reporting on Managerial Remuneration: Omitted

CARO 2016	CARO 2020
1. Whether managerial remuneration is paid after taking requisite approvals defined u/s 197	Omitted in CARO 2020.
2. Amount of unapproved remuneration and steps taken to secure its refund	Omitted in CARO 2020.

Reporting on Public Offer: No Change

CARO 2016	CARO 2020
1. Utilization of money raised through IPO or FPO for the earmarked purposes for which it was raised	Same as CARO 2016.
2. In case of any delay and defaults in utilization, details thereof	Same as CARO 2016.

Reporting on Nidhi company: Modified

CARO 2016	CARO 2020
1. Maintenance of net owned funds to deposits in the ratio of 1:20 to meet out the liability	1. Maintenance of net owned funds to deposits in the ratio of 1:20 to meet out the liability
2. Maintenance of 10% unencumbered term deposits as specified in Nidhi Rules	2. Maintenance of 10% unencumbered term deposits as specified in Nidhi Rules
None	3. Whether there is any default in payment of interest on deposits or repayment thereof

Reporting on Related Party Transactions: No change

CARO 2016	CARO 2020
1. Whether all transactions with related parties have been made in compliance with Section 177 and 188	Same as CARO 2016.
2. Appropriate disclosure in FS in accordance with accounting standards	Same as CARO 2016.

Registration under RBI: Modified

CARO 2016:    

1. Whether registration has been obtained by NBFCs liable to be registered under the RBI Act

CARO 2020:    

1. Whether registration has been obtained by NBFCs liable to be registered under the RBI Act
2. Conduction of any NBFC activities without holding a valid Certificate of Registration (CoR)
3. Whether the company qualifies for a Core Investment Company (CIC)
4. The number of CICs if the group has more than one CIC

Reporting on Non-cash transactions: No change

CARO 2016	CARO 2020
Any non-cash transactions entered into with directors or related persons is within the limits provided u/s 192	Same as CARO 2016.

Reporting on Private Placement or Preferential Allotment: No change

CARO 2016	CARO 2020
1. Private placement or preferential allotment made by the company is in accordance with Section 42 and 62	Same as CARO 2016.
2. Whether the amount raised has been utilized for the purposes for which it was raised	Same as CARO 2016.

Paragraph 4: No change

CARO 2016	CARO 2020
If CARO report to be annexed with the auditor’s report contains any unfavorable or qualified remarks, the auditor shall state the reasons for his opinion.	Same as CARO 2016.

*Note A – Details of Title Deeds as prescribed under CARO 2020

Description of property	Gross carrying value	Held in name of	Whether promoter, director or their relative or employee	Period held – indicate range, where appropriate	Reason for not being held in name of company
–	–	–	–	–	Also indicate if in dispute

** Note B – Details of Default in repayment as prescribed under CARO 2020

Nature of borrowing, including debt securities	Name of lender	Amount not paid on due date	Whether principal or interest	No. of days delay or unpaid	Remarks, if any
–	Lender wise details to be provided in case of defaults to banks, financial institutions, and Government	–	–	–	–

Increased Due Diligence

Looking at the circumstances which have led to the introduction of CARO 2020, we have been besieged by a number of corporate failures (especially IL&FS) and a whole boost of exposure to corporate frauds as witnessed under IBC, which has triggered CARO 2020. It is a very decisive and concerted effort to bring in more accountability, corporate trusteeship, and transparency and to use the auditors as a via media to ensure corporate governance.

A different feature of CARO 2020 is the enhanced due diligence responsibility on the auditors. A typical auditor is concerned about the truth and fairness of the FS; however, CARO 2020 covers many governance issues on which the MCA requires the auditors to comment. The audit has been used as a mechanism to control corporate misgovernance. The auditors have to state more details under CARO 2020 in order to strengthen the accountability of the management through the mouth of the auditor.                  

The following are some important changes in CARO 2020 which strive to assert a greater level of due diligence:

• Bringing into picture CSR details which were missing in CARO 2016 to accord more accountability on companies who were not taking CSR seriously
• Going concern reporting is strengthened by adding additional clause on the company’s capability to meet its liabilities
• Consideration of the issues of the previous auditor
• Separate reporting of negative cash losses visible in the cash flow statement
• Activities carried out by NBFCs or HFCs without valid certificates
• Disclosure on the work of internal auditors
• Reporting of transactions not recorded in the books of account but surrendered in income tax assessments
• Giving due recognition to whistleblower complaints
• More stringent and detailed disclosures on loans and advances
• Defining material discrepancies in inventory values and PPE values
• Compliance by companies who have been sanctioned working capital limits in excess of Rs. 5 crore