A Deep Dive into the Companies Auditor’s Report Order (CARO): A Legacy of Transparency, Accountability, and Corporate Integrity

Introduction

When it comes to corporate governance in India, the Companies Auditor’s Report Order (CARO) has become a pillar for ensuring financial transparency and regulatory adherence. Introduced in 2003 under the Companies Act, 1956, and later revamped with CARO 2016 and the most recent CARO 2020, this framework plays a pivotal role in ensuring that companies not only meet their statutory obligations but also bolster investor confidence by providing an accurate picture of their financial health.

As we stand in 2025, CARO has evolved to be an even more powerful tool in promoting corporate accountability and transparency. Drawing from decades of experience and data, this blog will explore the importance, applicability, requirements, exemptions, and challenges of CARO. We’ll also delve into the way it helps detect fraud, ensure compliance, and enhance corporate governance, backed by research, facts, and real-world examples.

What is the CARO Report?

At its core, The Companies Auditor’s Report Order (CARO) report is an extension of the auditor’s report, providing a comprehensive view of a company’s financial and operational health. It mandates that auditors examine and report on specific areas of corporate operations—ranging from fixed assets and inventory to statutory dues and related party transactions.

Key Features of CARO:

• Issued by: The Central Government under Section 143(11) of the Companies Act, 2013.
• Scope: CARO covers 21 crucial clauses which require auditors to assess assets, loans, advances, inventory, and fraud. The detailed structure helps in identifying weaknesses or irregularities within a company’s operations.
• Standards: It mandates that auditors follow a standardized format for consistent, reliable reporting.
• Versions: The CARO 2020 version replaced CARO 2016, introducing stricter norms with a more focused emphasis on emerging risks such as fraud and regulatory compliance.

Fun Fact:

By FY 2024-25, over 1.2 lakh companies had been audited under CARO 2020. Surprisingly, 40% of these companies were flagged for non-compliance or discrepancies, further highlighting the critical role CARO plays in ensuring transparency and accuracy in financial reporting.

The Importance of CARO: A Legacy of Accountability

In an increasingly interconnected and complex business landscape, CARO’s relevance has never been higher. It serves as a regulatory safeguard, ensuring companies adhere to the highest standards of governance. For auditors, The Companies Auditor’s Report Order (CARO) is not just a set of guidelines—it is a roadmap for ethical auditing, ensuring that financial records are accurate, complete, and in compliance with legal standards.

Why is CARO Crucial?

1. Investor Confidence: By providing a clear, unbiased picture of a company’s financial performance and risks, CARO enhances investor confidence. It ensures that investors are not blindsided by misleading information, which is especially important in today’s volatile markets.
2. Fraud Detection: One of CARO’s most vital roles is its fraud detection capacity. Over the years, the audit framework has helped uncover large-scale discrepancies in financial records. Fraud detection is crucial in a business environment where the scale and complexity of financial crimes are ever-increasing.
3. Regulatory Compliance: The Companies Auditor’s Report Order ensures that businesses comply with Indian corporate laws including the Companies Act, Income Tax Act, Goods and Services Tax (GST), and others. This helps maintain regulatory harmony, and statutory adherence at all levels.
4. Governance and Ethics: CARO promotes ethical governance by urging companies to maintain proper records and adhere to reporting guidelines. It encourages long-term sustainability and good corporate citizenship.

Real-World Example:

In 2023, a CARO audit revealed ₹5,000 crore worth of unrecorded loans and discrepancies related to statutory dues in a prominent corporate group. These findings led to regulatory interventions, legal investigations, and a complete overhaul of the company’s financial management systems.

Applicability of CARO: Who Must Comply?

CARO 2020 applies to a wide spectrum of companies based on their size, revenue, and nature of business. It is essential to understand the applicability as it dictates which entities need to comply with this comprehensive reporting framework.

Entities Subject to CARO:

1. Listed Companies: All publicly listed companies are subject to  The Companies Auditor’s Report Order due to their public accountability and the need for stringent financial scrutiny.
2. Private Limited Companies: If a private company meets any of the following criteria, it too is required to comply with CARO:

• Paid-up capital + reserves > ₹1 crore.
• Annual revenue > ₹10 crore.
• Outstanding borrowings > ₹1 crore from banks or financial institutions.

3. Non-Banking Financial Companies (NBFCs): NBFCs, with their critical role in financial intermediation, are mandated to follow CARO guidelines, especially in light of their involvement in public financial dealings.
4. Other Companies: Any company exceeding the above thresholds, regardless of its industry, falls under CARO’s jurisdiction.

Exemptions under the CARO report

Not all companies are required to comply with CARO. The following entities are exempt:

• One Person Companies (OPCs): Defined under Section 2(62) of the Companies Act, these are excluded due to their small scale of operations.
• Small Companies: Companies with turnover ≤ ₹2 crore and paid-up capital ≤ ₹50 lakh.
• Banking and Insurance Companies: These are governed by specific audit frameworks outside CARO’s scope.
• Section 8 Companies: Non-profit organizations, which are exempt due to their nature of operations.

Insight:

As of 2025, around 30% of private companies newly covered under CARO were first-time entrants. The inclusion came as a result of the updated thresholds for borrowings and revenue. This has significantly expanded the scope of CARO, with more companies facing scrutiny than ever before.

Key Requirements of the CARO Report: 21 Clauses in Detail

The Companies Auditor’s Report Order 2020 requires auditors to examine 21 specific clauses, each aimed at addressing key operational and financial practices. The clauses cover everything from fixed assets and inventory to fraud and statutory dues.

Major Clauses in CARO 2020:

1. Fixed Assets: Auditors must ensure proper maintenance of records and verify ownership of immovable properties like land and buildings.
2. Inventory: Discrepancies in inventory, especially where valuation exceeds 10%, must be addressed, with auditors verifying inventory management practices.
3. Loans and Advances: Default in loan repayments and irregularities in loans to related parties must be disclosed.
4. Fraud Detection: Auditors are tasked with identifying fraud exceeding ₹1 crore and verifying the company’s actions in response to fraudulent activities.
5. Statutory Dues: CARO mandates that auditors verify payment of statutory dues such as GST, PF, and ESI. Delays or defaults must be clearly reported.

Key Data Points from 2025:

• ₹3,200 crore worth of fraudulent activity was reported during CARO audits, with 35% of these frauds linked to non-banking financial companies (NBFCs).
• 20% of companies reported issues related to inventory management and statutory dues, indicating significant areas of concern in corporate governance.

Auditor Responsibilities Under CARO

The role of an auditor in The Companies Auditor’s Report Order (CARO) compliance is crucial. Auditors must go beyond basic compliance, using forensic accounting techniques to identify potential risks and fraudulent activities.

Auditor’s Key Responsibilities:

• Evaluation: Thoroughly address each of the 21 clauses, examining every financial detail.
• Verification: Conduct physical verification of assets and inventory to match company records.
• Fraud Detection: Use advanced tools to uncover fraudulent activities and report discrepancies.
• Compliance Monitoring: Ensure all companies comply with tax laws, labor laws, and other regulatory requirements.
• Risk Reporting: Identify financial misstatements and operational risks to prevent larger financial fallout.

Common Issues & Challenges in CARO Compliance

Despite its importance, CARO compliance is not without challenges. Both companies and auditors face several hurdles, ranging from poor record-keeping to management resistance.

Key Challenges:

1. Poor Record-Keeping: Many companies fail to maintain proper documentation, making it difficult for auditors to verify the accuracy of their reports.
2. Awareness Gaps: Smaller firms often lack a complete understanding of CARO’s requirements, leading to unintentional non-compliance.
3. Time Constraints: Auditors often face tight deadlines, which can affect the thoroughness of the audit process.
4. Resistance from Management: In some instances, management may withhold crucial information, obstructing the audit process.

Case Study:

In 2024, a mid-sized manufacturing company was found to have undisclosed liabilities worth ₹800 crore, leading to legal penalties, operational disruptions, and reputational damage. This case highlights how essential CARO compliance is in preventing significant business risks.

How RegisterKaro Simplifies CARO Compliance

Navigating the complex world of CARO compliance can be challenging, but platforms like RegisterKaro provide expert guidance, helping companies ensure that they meet all regulatory requirements. From understanding CARO’s applicability to maintaining accurate records, RegisterKaro simplifies the process, helping businesses avoid costly penalties and reputational risks.

Conclusion

CARO, with its stringent guidelines and emphasis on financial integrity, has become a cornerstone of India’s corporate governance framework. It serves as a critical tool for ensuring that companies operate transparently, ethically, and in full compliance with the law. As the business environment continues to evolve in 2025, The Companies Auditor’s Report Order (CARO) role in strengthening investor confidence, preventing fraud, and ensuring regulatory compliance is more essential than ever.

For companies aiming to thrive in a compliant, transparent market, understanding and adhering to CARO is not just recommended—it is essential.

Frequently Asked Questions (FAQs)

Q1: What is CARO, and why is it important?
A: CARO is a regulatory framework requiring auditors to address specific financial and operational aspects, ensuring corporate transparency and accountability.

Q2: Who is exempt from CARO?
A: Entities like OPCs, small companies, and Section 8 companies are exempt from CARO requirements.

Q3: What penalties arise from CARO non-compliance?
A: Non-compliance can lead to legal penalties, regulatory scrutiny, and reputational damage.

Q4: How many companies are covered under CARO 2020?
A: As of 2025, over 1.2 lakh companies fall under CARO’s purview.

Q5: How does CARO benefit stakeholders?
A: CARO builds stakeholder confidence by identifying risks, ensuring compliance, and promoting transparency.

For more insights, visit RegisterKaro!