In recent years in India, the financial and corporate frauds and scams have rekindled the thought for corporate governance and stringent provisions to tackle fraud. This prompted the lawmakers to statutorily deal with this problem.
The Companies Act, 1956 also recognizes the concept of “fraud” as it has provisions for punishment with regard to fraudulent practices, however, it is noteworthy that although the Companies Act, 1956 dealt with fraud, it did not have any specific definition of fraud. On the other side, The Companies Act, 2013, provides clear definition and punishment of fraud.
What amounts to “Fraud”?
The term Fraud is defined in Explanation to section 447 of the Companies Act, 2013.
“Fraud” in relation to affairs of a company or any Body corporate, includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss;
“Wrongful gain” means the gain by unlawful means of property to which the person gaining is not legally entitled;
“Wrongful loss” means the loss by unlawful means of property to which the person losing is legally entitled.
Who is required to report Fraud?
As per Section 143(12) of Companies Act, 2013, the following persons are responsible for reporting of Fraud:
- Statutory Auditors
- Cost Auditors conducting Cost Audit under Section 148
- Company Secretary conducting Secretarial Audit under Section 204
- Branch Auditor appointed under Section 139
However, the VAT Auditors or Sales Tax Auditors are out of the purview of the above reporting.
It may also be noted that internal auditors covered under Section 138 are not specified as persons who are required to report under Section 143(12).
It is important to note that the above auditors are required to report the fraud pertaining to officers and employees of the company and does not include frauds committed by third parties like vendors and customers.
What is the process of reporting of Fraud?
Rule 13 of Companies (Audit and Auditors) Amendments Rules, 2015 prescribes the procedure for reporting of fraud by the Auditors.
- In case the amount of fraud is Rs. One Crore (10 million) or more:
- Auditor shall report the fraud to the Board or Audit Committee immediately but not later than 2 days of his knowledge of such fraud
- Audit Committee or Board shall submit their reply to Auditor within 45 days of reporting of fraud
- Auditor shall forward his report along with Management reply to Central Government within 15 days from the date of receipt of management reply
- In case of no reply from the Audit Committee or Board, Auditor shall submit his report to Central Government at the end of 45 days, which is the stipulated time period to receive management reply.
- In case the amount of fraud is less than Rs. One Crore (10 million):
- Auditor shall report the fraud to the Board or Audit Committee immediately but not later than 2 days of his knowledge of such fraud
- Report of the Auditor on fraud along with detail the remedial actions shall be disclosed in the Board’s Report
The report of the Auditor shall be in form of a statement as specified in Form ADT-4. The report shall be on the letterhead of the Auditor, containing postal address, e-mail address, contact number and be signed by the Auditor with his seal and shall indicate his Membership Number.
What are the consequences/ punishment under Fraud?
Consequences to Auditors:
If any Statutory Auditor, Cost Accountant or Company Secretary in practice fail to report the fraud and does not comply with the provisions of section 143(12) of the Companies Act, he shall be punishable with fine of atleast one lakh rupees which may extend to twenty-five lakh rupees. {Section 143(15)}
Consequences to the Person liable for fraud:
Any Person, who is found to be guilty of fraud, shall be punishable with imprisonment for a term of minimum six months which may extend to ten years AND also liable to fine which shall not be less than the amount involved in the fraud which may extend to three times the amount involved in the fraud. {Section 447}
