Internal and Forensic Audit · Forensic Audit: Laws and Regulations

Fraud under Companies Act, 2013 and Auditor's Duty

Updated 11 October 2026 · Fact-checked

Section 447 defines fraud in company affairs and fixes its punishment. Section 143(12) requires an auditor who has reason to believe an offence involving fraud is being or has been committed by officers or employees to report it: to the Central Government if the amount is at or above the specified threshold, otherwise to the Audit Committee or Board.

Understand Fraud under the Companies Act, 2013 and Auditor's Duty

Fraud in company law is wider than theft or loss. Section 447 says fraud includes any act, omission, concealment of any fact or abuse of position, done with intent to deceive, to gain undue advantage from, or to injure the interests of the company, its shareholders, its creditors or any other person. The key words are intent and abuse of position. Fraud exists whether or not there is any wrongful gain or wrongful loss.

The definition also reaches a person who acts with the connivance of another. So a clerk, a director, or an outsider who helps may all be caught. The Act defines wrongful gain as gain by unlawful means of property to which the person is not legally entitled. Wrongful loss is loss by unlawful means of property to which the person losing is legally entitled.

Fraud differs from error by intent. An error is an unintentional mistake, such as a wrong total or a misread figure. Fraud is a deliberate act. The auditor often cannot prove intent, which is why section 143(12) uses the words "reason to believe". The auditor does not need to prove fraud before reporting. The auditor is not a judge.

Punishment depends on size and public interest. For fraud involving at least ₹10 lakh or 1% of turnover, whichever is lower, imprisonment is from six months to ten years, plus a fine of at least the amount involved and up to three times that amount. If public interest is involved, imprisonment is at least three years. For smaller fraud that does not involve public interest, imprisonment may extend to five years, or a fine up to ₹50 lakh, or both.

Section 143(12) puts a duty on the auditor. If the auditor has reason to believe that an offence involving fraud is being or has been committed against the company by officers or employees, the auditor must report it. Large frauds go to the Central Government. Smaller frauds go to the Audit Committee, or to the Board where there is no Audit Committee. Section 143(14) extends this to cost auditors and to company secretaries in practice conducting secretarial audit. That last point matters for you as a CS.

Key rules to remember

Fraud (section 447 Explanation): Fraud = act / omission / concealment of fact / abuse of position + intent to deceive, gain undue advantage or injure; Wrongful gain or loss is not required. Connivance by another person is covered.
Punishment: fraud at or above threshold: Imprisonment 6 months to 10 years + fine of at least the amount involved, up to 3 times that amount; Threshold is ₹10 lakh or 1% of turnover, whichever is lower. If public interest is involved, imprisonment is at least 3 years. This threshold is for punishment only, not for the reporting route.
Punishment: smaller fraud: Imprisonment up to 5 years, or fine up to ₹50 lakh, or both; Applies where the amount is below the section 447 threshold and public interest is not involved.
Auditor's duty: section 143(12): Reason to believe + offence involving fraud + by officers or employees → report immediately to Central Government if the amount is at or above the specified amount (₹1 crore under the rules); Section 143(12) says only 'specified amount'. The Companies (Audit and Auditors) Rules, 2014 (Rule 13) set it at ₹1 crore. It is separate from the section 447 punishment threshold. Below ₹1 crore, report to the Audit Committee or the Board, as prescribed.
Disclosure where reported only to Audit Committee or Board: Company discloses details of such frauds in the Board's report; Applies where the auditor reported to the Audit Committee or Board and not to the Central Government.
Penalty for non-compliance: section 143(15): Listed company: ₹5 lakh. Other company: ₹1 lakh; Applies to an auditor, cost accountant or company secretary in practice who does not comply with section 143(12).
Protection: section 143(13): Good faith reporting does not breach any duty of the auditor; Protects the auditor from a claim of breach of confidentiality.

How to solve Fraud under the Companies Act, 2013 and Auditor's Duty questions

Use this method for any fraud or auditor-duty question. It follows the provision, analysis, conclusion pattern the paper expects.

1Read the facts and list who did what, and with what intent. Note the amount, the company's turnover and whether it is listed.
2Test the act against the section 447 definition: act, omission, concealment or abuse of position, plus intent to deceive, gain undue advantage or injure. State whether it is fraud or only an error.
3Check who committed it. Section 143(12) applies to fraud against the company by officers or employees. Note if the facts involve outsiders.
4Compare the amount with the specified threshold to decide the route: Central Government or Audit Committee / Board.
5State the timing and mode: report immediately, in the manner and time prescribed. Mention the Board's report disclosure if the Central Government was not informed.
6Apply the punishment under section 447, checking amount, public interest and the proviso on smaller fraud.
7Add the penalty under section 143(15) if the auditor failed to report, and the good-faith protection under section 143(13) if the auditor did report.
8Write a clear conclusion and a practical point, such as documenting evidence and the auditor's reasons.

Quickest way: Four-question check

When to use it: Use when time is short and the case is a short fact pattern.

Intent? If no intent, it is error, not fraud.
Who? Officers or employees against the company means section 143(12) applies.
How much? At or above the threshold means the Central Government. Below means the Audit Committee or Board.
Consequence? Give the section 447 punishment and the section 143(15) penalty for a failure to report.

Common mistakes in Fraud under the Companies Act, 2013 and Auditor's Duty

Saying fraud needs wrongful gain or loss.
Students think of fraud as theft.
Fix: Quote the Explanation: fraud covers acts with intent to deceive, whether or not there is any wrongful gain or loss.
Mixing up fraud and error.
Both cause misstatement in accounts.
Fix: Use intent as the test. Error is unintentional. Fraud is deliberate.
Saying the auditor must prove fraud before reporting.
Students assume a legal finding is needed.
Fix: The test is reason to believe. The auditor reports on that belief, and good faith reporting is protected.
Sending every fraud to the Central Government.
Students forget the proviso.
Fix: Below the specified amount, report to the Audit Committee or the Board. The company then discloses it in the Board's report.
Applying the duty only to statutory auditors.
The section is read as an audit section only.
Fix: Section 143(14) applies it to cost auditors and to a company secretary in practice doing secretarial audit.
Mixing up the threshold and the punishment bands.
Both use ₹10 lakh and 1% of turnover.
Fix: Remember: the lower of ₹10 lakh and 1% of turnover. At or above it, 6 months to 10 years. Below it, up to 5 years or fine up to ₹50 lakh or both.

Worked examples

Example 1

The accountant of Sharma Textiles Ltd, an unlisted company, inflates expense bills and diverts ₹4,00,000 to his own account over a year. The company's turnover is ₹500 crore. The statutory auditor finds the pattern during the audit. Advise the auditor.

Show the solution

Fraud test: the accountant used false bills (act and concealment), abused his position and acted with intent to gain undue advantage. This is fraud under section 447, not an error.
Who: an employee committed it against the company. Section 143(12) applies.
Reporting amount: section 143(12) uses the 'specified amount', which the Companies (Audit and Auditors) Rules, 2014 (Rule 13) fix at ₹1 crore. The fraud of ₹4,00,000 is below ₹1 crore.
Route: the auditor reports to the Audit Committee, or to the Board if there is no Audit Committee, within the time and in the manner prescribed.
Company's duty: the details must be disclosed in the Board's report as the auditor did not report to the Central Government.
Punishment threshold (separate from the reporting amount): the section 447 threshold is the lower of ₹10 lakh and 1% of turnover. 1% of ₹500 crore is ₹5 crore, so the lower is ₹10 lakh. The fraud of ₹4,00,000 is below it.
Accountant's liability: the fraud is below the section 447 threshold, so assuming no public interest, imprisonment may extend to five years, or fine up to ₹50 lakh, or both.

Answer: The auditor must report to the Audit Committee or the Board, not the Central Government, because the amount is below the ₹1 crore specified amount. The company must disclose the fraud in the Board's report. The accountant faces up to five years' imprisonment or a fine up to ₹50 lakh or both.

Example 2

The Managing Director of Ganga Pharma Ltd, a listed company, conceals loans of ₹8 crore taken from a related party. The auditor suspects the concealment but does not report it, saying fraud is not proved. Examine the auditor's position.

Show the solution

Fraud: concealment of a fact by a person in a position of authority, with apparent intent to gain undue advantage or injure the company. This points to fraud under section 447.
Auditor's duty: section 143(12) needs only reason to believe, not proof. Officers of the company are involved, so the duty applies.
Reporting amount: ₹8 crore is above the ₹1 crore specified amount under the Companies (Audit and Auditors) Rules, 2014 (Rule 13). So the matter goes to the Central Government, and the auditor must report immediately, in the manner prescribed.
Consequence of silence: the company is listed, so section 143(15) imposes a penalty of ₹5 lakh on the auditor.
Defence: the auditor would have been protected by section 143(13) if the report had been made in good faith.
Punishment threshold: the section 447 threshold is the lower of ₹10 lakh and 1% of turnover. ₹8 crore is above ₹10 lakh, so it is above the lower of the two limits whatever the turnover is. The fraud is at or above the threshold.
Fraud punishment: if the MD is guilty, imprisonment is six months to ten years and a fine of at least ₹8 crore, up to three times that amount (₹24 crore). If public interest is involved, imprisonment is at least three years.

Answer: The auditor's reasoning is wrong. Reason to believe is enough, so the auditor should have reported to the Central Government immediately. Failure attracts a ₹5 lakh penalty as the company is listed. The MD faces imprisonment of six months to ten years and a fine of ₹8 crore to ₹24 crore if found guilty.

Exam tips

Quote the Explanation to section 447 word for word where you can. It is the most tested part.
Always show the threshold calculation: the lower of ₹10 lakh and 1% of turnover.
Name sections precisely: 447 for definition and punishment, 143(12) for reporting, 143(13) for protection, 143(14) for extension, 143(15) for penalty.
End case answers with a practical step: document evidence, record management's reply and use the prescribed manner of reporting.
Do not quote prescribed time limits or form numbers unless you are sure. Say reporting is within the time and manner prescribed by the rules.

Practice questions from Forensic Audit: Laws and Regulations

Fraud under the Companies Act, 2013 and Auditor's Duty in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Fraud under the Companies Act, 2013 and Auditor's Duty: frequently asked questions

What is the punishment for fraud under section 447?

For fraud at or above the threshold, imprisonment is from six months to ten years and fine of at least the amount involved, up to three times that amount. If public interest is involved, imprisonment is at least three years. Smaller fraud without public interest carries up to five years, or fine up to ₹50 lakh, or both.

When must an auditor report fraud under section 143(12)?

When the auditor has reason to believe, during the course of duties, that an offence involving fraud is being or has been committed against the company by officers or employees. Reporting is immediate and in the manner and time prescribed. Proof is not required.

What is the difference between fraud and error in audit?

Intent is the difference. Error is an unintentional mistake in figures or judgment. Fraud is an intentional act, omission, concealment or abuse of position to deceive or gain undue advantage.

What is the penalty if the auditor does not report fraud?

Under section 143(15), the penalty is ₹5 lakh for an auditor of a listed company and ₹1 lakh for any other company. It also applies to a cost accountant or a company secretary in practice who fails to comply.

Does section 143(12) apply to a company secretary?

Yes, to a company secretary in practice conducting secretarial audit under section 204, through section 143(14).