CARO and Its Impact on Public Limited Companies

Introduction
The Companies (Auditor’s Report) Order (CARO) is a regulatory framework issued by the Ministry of Corporate Affairs (MCA) under the Companies Act, 2013. CARO imposes specific reporting requirements on statutory auditors during the audit of financial statements. Its objective is to enhance the transparency, reliability, and depth of audit reports, particularly for companies with public accountability such as Public Limited Companies. The latest iteration, CARO, 2020, came into effect from financial year 2021–22. This article explains the scope, applicability, and impact of CARO on Public Limited Companies.

Definition and Purpose of CARO
CARO is an additional reporting requirement that supplements the statutory auditor’s report under Section 143 of the Companies Act. It contains a list of specified matters that auditors must comment upon, thereby ensuring that critical areas of company operations are thoroughly examined and disclosed. The aim is to detect and prevent financial irregularities and mismanagement.

Applicability of CARO to Public Limited Companies
CARO is applicable to all Public Limited Companies, except:

• One Person Companies (OPCs)
  
• Small companies as defined under the Companies Act
  
• Banking companies
  
• Insurance companies
  
• Companies licensed under Section 8 (non-profits)
  

Thus, almost all standard Public Limited Companies, especially listed ones, fall under the scope of CARO.

Key Reporting Requirements under CARO
Auditors must comment on over 20 clauses under CARO, including:

• Maintenance of proper records for fixed assets
  
• Disclosure of title deeds of immovable property
  
• Inventory and working capital verification
  
• Details of loans and guarantees given to related parties
  
• Compliance with statutory dues (GST, Income Tax, etc.)
  
• Instances of fraud by or on the company
  
• Internal audit system adequacy
  
• Defaults in repayment of loans or borrowings
  
• Undisclosed income and accounting treatment
  

Each clause demands detailed verification and documentation by auditors.

Impact on Corporate Transparency
CARO compels Public Limited Companies to maintain high standards of record-keeping and internal controls. It brings attention to specific risk areas such as non-compliance, financial misstatements, and governance lapses, thereby promoting financial discipline and investor confidence. The public nature of audit reports under CARO ensures that management is held accountable.

Strengthening the Role of Auditors
Auditors play a more active and investigative role under CARO. They must go beyond basic financial verification and assess operational compliance. For Public Limited Companies, this means:

• More detailed queries from auditors
  
• Longer audit timelines
  
• Increased need for internal coordination and documentation
  

CARO thereby elevates the audit function to a strategic compliance check.

Influence on Financial Reporting
CARO reporting directly impacts the presentation of financial statements. It ensures:

• Full disclosure of material facts
  
• Rectification of discrepancies before report finalization
  
• Greater scrutiny of related party transactions, loans, and asset valuation
  This results in more reliable and standardized financial reporting.
  

Risk Management and Compliance Monitoring
CARO helps identify red flags such as:

• Delayed payment of statutory dues
  
• Fraud or siphoning of funds
  
• Improper use of borrowed money
  These disclosures assist the company’s board, investors, and regulators in assessing risks and ensuring timely intervention.
  

Investor and Regulatory Confidence
For listed Public Limited Companies, CARO boosts transparency, helping shareholders and market participants make informed decisions. It also aids regulatory bodies like SEBI, MCA, and the Income Tax Department in monitoring corporate conduct and governance more effectively.

Conclusion
CARO is a vital reporting instrument that enhances the quality of audits and the credibility of financial statements in Public Limited Companies. By compelling auditors to report on specific operational and financial aspects, CARO ensures that companies operate within the legal and ethical framework. Its implementation strengthens corporate governance, risk management, and public trust in India’s corporate reporting ecosystem. Public Limited Companies must take CARO compliance seriously to maintain financial integrity and uphold investor confidence.

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