Introduction

India’s corporate sector is witnessing a rise in financial irregularities across a range of entities, including listed companies, tech-enabled startups, and promoter-led enterprises^.[1] Recent matters have highlighted concerns around weak internal controls, opaque decision-making, and limited Board oversight.^[2] These are not outliers; they reflect deeper vulnerabilities in governance frameworks and a rising expectation from regulators and investors for timely, transparent oversight by Boards and Audit Committees.

Lately, in response to these developments, regulatory scrutiny has intensified, and companies are now subject to greater accountability^.[3] A key statutory trigger is the detection of suspected fraud by statutory auditors and respective reporting under Section 143(12), Rule 13 of the Companies (Audit and Auditors) Rules, 2014.

Section 143(12) of the Companies Act, 2013, does not prescribe a specific definition of "fraud.^”[4] However, it refers to fraud in the context of a statutory auditor’s duty to report instances of fraud against the company by its officers or employees that the auditor has reason to believe has occurred or is being committed or is likely to be committed. Notably, the National Financial Reporting Authority’s (NFRA) June 2023^[5] circular also emphasizes and clarifies the auditors' statutory obligations concerning suspected fraud detection and reporting. Additionally, there are reporting requirements under the Companies Act, the Companies Auditor’s Report Order (CARO 2020).^[6]

Suspected fraud triggers may surface through various channels such as whistleblower complaints, internal audits, statutory audits, due diligence, court filings, customer or vendor complaints, or regulatory inquiries. Regardless of the origin, Boards must operate with a sense of urgency and action. Missteps at such as inaction, inconsistent messaging, or inadequate review may lead to reputational damage, lost investor / shareholder confidence or even further scrutiny by regulatory authorities.

Understanding Reporting for Suspected Fraud

Under Section 143(12) of the Companies Act, 2013, Rule 13 of the Companies (Audit and Auditors) Rules, 2014:

Suspected frauds of INR 1 crore or more

If an auditor suspects a fraud of INR 1 crore or more during an audit, they must report it to the Central Government through Form ADT-4 within a strict 60-day timeline.

• Step 1: Auditor notifies the Board/Audit Committee in writing within 2 days of identifying or becoming aware of a suspected fraud.
• Step 2: Board/Audit Committee must respond in writing to the auditor within 45 days from the date of receiving the auditor’s communication.
• Step 3: Auditor may file Form ADT-4 with the Ministry of Corporate Affairs (‘MICA’)^[7] within 15 days of receiving the written response from the Board / Audit Committee. If no reply is received, the 15-day period for filing Form ADT-4 begins after the expiry of the 45 days from the date of the original communication.^[8]

Suspected frauds of less than INR 1 crore

Suspected frauds involving less than INR 1 crore are required to be reported only to the Board or the Audit Committee. While they do not trigger reporting to the Central Government, they must still be appropriately disclosed in the Board’s report.

Initial response framework

In the event of a communication by the auditor of a suspected fraud under Section 143(12), it is recommended that the Board constitute a Special Committee to independently lead and manage the company’s response to the suspected fraud:

• The Special Committee should ideally comprise only independent directors — with appropriate key investors, General Counsel, external legal advisors, and an independent forensic consultant ^[9] . may also be included to ensure an unbiased investigation. However, in practice — particularly in smaller companies with fewer independent directors — it may not always be feasible to form a committee comprised solely of independent directors.
• Members of senior management, heads of departments, or any individuals potentially implicated in the matter must be excluded to avoid conflicts of interest.
• The external experts engaged, whether legal or forensic, must possess the necessary skill sets and prior experience in handling sensitive fraud-related matters and Section 143(12) led scenarios. Their role is to conduct an independent, fact-based review; preserve legal privilege where applicable; and maintain detailed documentation of all workpapers, supporting information, statements, procedures and findings.

This whitepaper sets out a practical framework for Special Committees navigating situations arising from such communication by the auditors. It outlines key challenges a Special Committee may encounter, and critical steps required to ensure a timely, well-investigated and factual response.

Key challenges for management

In this section, we summarise the key challenges a Special Committee may face while navigating such sensitive matters.

Timebound action

Once the auditor communicates the Board about the suspected fraud, the Board has 45 days to respond to the auditor, as prescribed under Rule 13. The tight timeline can pose significant challenges especially in complex fraud cases. Key challenges include:

• Data availability and integrity
• Preserving digital data such as emails, shared drives, system logs, employee devices, etc.
• Cross functional coordination
• Unravelling the modus operandi especially for sophisticated fraud schemes
• Quantifying financial impact
• Ensuring business continuity while minimising operational impact

Onboarding the right forensic specialist and external counsel as advisors

One of the earliest and most sensitive responsibilities of the Special Committee is identifying and onboarding independent external experts, particularly forensic consultants and legal counsel, as internal resources may lack the objectivity or technical expertise required to conduct a credible investigation.

However, identifying and onboarding the right external advisors is rarely straightforward, particularly in such high-stake situations. Some key considerations for a Special Committee include:

• Ensuring independence and avoiding real or perceived conflicts, especially in promoter-led or closely held companies, where pre-existing relationships or dependencies can impact the credibility of an investigation.
• Striking the right balance between expertise and discretion; advisors must bring deep forensic, regulatory, and investigative knowledge while operating with diligence, speed, and confidentiality. The risk of information leaks or internal disruption must be proactively managed.
• Preserving legal privilege from the outset; it requires early involvement of a capable external counsel to ensure that communications and findings remain privileged.
• Managing internal stakeholders and communication around the initiation of a forensic investigation, as this can trigger speculation and anxiety within the organisation. Early messaging must be carefully crafted to maintain internal stability while asserting the importance of conducting an independent investigation to find facts.

Evaluation of the fraud lifecycle

A critical step in responding to suspected fraud is achieving alignment on the scope of investigation. Reaching consensus among multiple stakeholders including the Board, legal counsel, forensic consultants, and the auditors can be challenging, particularly when stakeholder priorities diverge. It is essential that the scope includes a clear, fact-based understanding of the full lifecycle of the suspected fraud. This requires independent evaluation across the following areas:

• Modus operandi – How was the fraud perpetrated?
• Scope and involvement – Who were the key individuals involved, whether as perpetrators, enablers, or passive participants? Were external parties also implicated?
• Quantum and duration – What is the estimated financial impact, and over what period did the fraud occur?
• Root causes and control gaps – What allowed the fraud to go undetected? Were lapses driven by people, processes, technology, or a combination of all three?

Evaluating governance actions - challenges in implementing immediate and sustained responses

The Special Committee may need to stabilise the situation by directing immediate governance measures along with a clear plan and commitment for their implementation. This can be challenging due to limited clarity on the extent of the issue, the individuals potentially involved, and the processes that may be affected, making it difficult to act without diverting resources and time away from ongoing business operations.

The Special Committee may also need to consider imposing temporary and interim restrictions or controls to prevent further risk. Simultaneously, as and when facts continue to emerge, it must begin preparing for long term corrective actions.

Critical steps to be led by the Special Committee with support from legal and forensic experts

Once the initial response framework is ready, the Special Committee — supported by external legal counsel and forensic experts — may proceed with steps to lead a structured review and response to the suspected fraud. This includes fact-finding, documentation, enabling informed decisions on disclosures, disciplinary actions, and broader remediation. Some key steps are summarised below:

Immediate governance measures

While the forensic review may take time to identify all the facts, the Special Committee, in collaboration with forensic experts and legal advisors, must quickly implement short-term containment measures that protect the company from further harm. These actions are not intended to pre-empt the investigation’s outcome but to ensure operational stability, preserve evidence, and reassure key stakeholders. Key measures may include:

• Access restrictions: Temporarily suspending system or financial access for individuals under preliminary scrutiny, especially those with transaction approval rights or control over critical processes such as banking and accounting.
• Interim oversight on finance and cash flows: Appointing an independent reviewer or trusted finance resource to oversee cash disbursements, bank reconciliations, and key financial decisions during the investigation period, particularly where finance leadership is under review or involved.
• Data preservation protocols: Coordinating with IT and legal teams to secure email archives, shared drives, ERP data, company-provided mobile devices, and corporate messaging platforms, ensuring that no evidence is lost or tampered with.
• Interim reporting lines: Reassigning roles or decision-making authority from individuals under review, to avoid operational gaps while ensuring neutrality and oversight.
• Internal communication strategy: Framing a limited, need-to-know internal communication plan that addresses employee speculation without fuelling panic, especially in privately held or close-knit organisations.

Root-cause analysis

The Special Committee, in collaboration with forensic consultants and legal advisors, should conduct a structured root cause analysis to move beyond surface-level findings and uncover the full contours of a suspected fraud. This involves the use of forensic procedures such as email review, analysis of electronic data, examination of documents, data analytics procedures, public domain research, and structured employee interviews.

The objective is to piece together how the suspected fraud was perpetrated (modus operandi), who may have enabled or benefitted from it, and over what period the fraud occurred. This includes:

• Identifying control breakdowns such as manual overrides, inadequate segregation of duties, or ineffective review mechanisms.
• Tracing instances of collusion, circumvention, or the overriding of existing processes by individuals in positions of authority.
• Establishing the financial impact, both direct and indirect, to assess materiality and inform disclosures. Depending on the risk level or criticality of the area, a targeted (Pareto-based) review or 100% coverage may be essential.
• Understanding whether cultural, governance, or leadership lapses contributed to delayed detection or inadequate response.

This analysis forms the backbone of any long-term corrective action, helping Boards to take appropriate decisions, redesign controls, and enforce governance discipline.

Risk assessment

The Special Committee in collaboration with forensic experts and legal advisors should then initiate a targeted risk assessment to understand whether the identified fraud is isolated or shows symptoms of broader vulnerabilities.

The assessment typically includes:

• Identifying high-risk areas by examining processes prone to override, abuse, or insufficient oversight such as vendor onboarding and payments, intercompany transactions, employee reimbursements, and digital system access.
• Evaluating fraud risk indicators, including weak approval hierarchies, poor audit trails, influence of promoters’ related parties in the ecosystem in the form of employees or business partners, or overreliance on manual controls that may have enabled the issue.
• Assessing potential financial misstatements to determine whether interim reporting needs revision or disclosure, and whether broader forensic procedures are warranted.
• Flagging related risks such as data breaches, IP misuse, or third-party collusion that may not have been part of the original investigation scope but pose material risk.

This risk-focused lens will help the Special Committee in taking a more proactive and broader remediation strategy.

Collaboration and reporting

The Special Committee, along with the forensic experts and legal advisors, should work in close collaboration, ensuring clear communication channels and well-defined roles from the outset. Their collective aim should be to support the auditors by providing comprehensive information and relevant documentation, enabling them to form an informed opinion. Key expectations include:

• Tag-team approach: Forensic experts and legal advisors should engage in regular touchpoints with the Special Committee and auditors to provide status updates, flag important preliminary findings, and align on investigation priorities.
• Audit and regulatory readiness: The investigation should aim to address auditor concerns with completeness, evidentiary backing, and timely communication.
• Long-term governance measures: The Special Committee should also consider and document longer-term remedial actions, including potential legal proceedings, disciplinary measures, contractual remedies, and regulatory responses.

Documentation

Throughout the investigation and response process, the Special Committee must ensure that all relevant steps are systematically documented. This is critical for maintaining defensibility and to enable timely resolution by statutory auditors, regulators, and other stakeholders. Key elements include:

• Recording factual findings (along with supporting evidence and documentation), internal discussions, and the basis for decisions taken by the Board or Special Committee at each stage of the process.
• Maintaining a clear timeline of investigative actions such as data collection, data preservation, employee interviews, third-party communications, and any interim measures implemented.
• Documenting remedial measure, including changes in controls, governance actions taken, or disclosures made, to establish a record of responsible post-incident management.
• Maintaining detailed minutes of discussions and meetings that formed a part of the investigation.

A thorough documentation would help in addressing auditor queries satisfactorily and supporting accurate regulatory filings, including Form ADT-4.

Post-investigation actions

In many cases, the findings from the investigative review may trigger a broader set of corrective and compliance driven actions that the Special Committee should look into, along with support from forensic experts and legal advisors:

• Financial restatements and disclosure alignment: Where material misstatements are identified, forensic experts work closely with auditors, legal counsel, and the finance team to restate affected financials. This includes verifying corrected entries, preparing revised disclosures, and ensuring appropriate regulatory filings are made in line with regulatory requirements.
• Remediation and Governance Enhancements: As mentioned in the earlier section, the Special Committee, with support from forensic and legal advisors, should develop a structured remediation roadmap that addresses the root causes of the incident. This includes strengthening internal control frameworks, redesigning workflows to eliminate conflict-prone steps, and instituting robust checks in high-risk areas such as vendor onboarding, customer contracting, and financial approvals. At the same time, the Committee should use insights from the investigation to reassess and enhance broader governance mechanisms, such as, clarifying reporting lines, improving Board oversight of key risk areas, reinforcing whistleblower protocols, and addressing cultural or supervisory gaps that may have enabled the fraud.
• Strengthening financial oversight and internal audit post-investigation: Following the investigation, the Special Committee should ensure continuity of oversight on the company’s finance function through a two-pronged approach:
• Interim financial oversight: For at least 6 months post-investigation, an independent finance resource (such as a third-party CFO/controller) may be deployed to monitor cash flows, oversee key disbursements, and ensure adherence to revised protocols, especially where internal finance leadership is implicated or under review.
• Independent internal audit: Where an internal audit (IA) function does not exist or lacks independence, a reputed third-party firm should be appointed to establish or reconstitute the IA function. In addition to long-term monitoring of corrective actions, this IA team can also support short-term stabilization by providing independent checks on cash transactions, procurement decisions, and financial controls.
• Stakeholder communication: The company should convey its commitment to transparency, explain the corrective actions being taken, and reaffirm stability to regulators, investors, and employees. Consultants can assist the Committee in preparing factual disclosures, FAQs, and discussion points for leadership.

Conclusion

The steps taken when responding to suspected fraud, particularly one triggering auditor reporting under Section 143(12), is a defining governance moment for any Board. The process demonstrates the company’s ethical compass, its capacity for institutional self-correction, and its resilience under regulatory and reputational pressure. A well-constituted Special Committee, supported by credible forensic and legal advisors, can help steer the organisation through uncertainty with transparency, confidence and action.

[1] https://www.linkedin.com/pulse/corporate-governance-india-clash-between-aspiration-entrenched-kumar-kkzif/ ; https://www.ey.com/en_in/insights/forensic-integrity-services/top-regulatory-compliance-challenges-facing-india-inc-in-2025

[2] https://www.livelaw.in/law-firms/law-firm-articles-/corporate-governance-bharatpe-dhfl-gomechanic-atreus-law-firm-293915

[3] https://kb.icai.org/pdfs/PDFFile5b276acda1ecf3.64214733.pdf ; https://www.icsi.edu/media/webmodules/CSJ/June_24/14.pdf

[4] Note: Section 143(12) itself does not define the term but mandates reporting of identified or suspected fraudulent activity by officers or employees to the extent it impacts the company. The term "fraud" in this context is interpreted in line with Section 447 of the Companies Act, 2013, as Section 447 defines fraud broadly to include any act, omission, concealment, or abuse of position committed with intent to deceive, gain undue advantage, or injure the company, its shareholders, or creditors.

[5] The NFRA Circular dated 26 June 2023 clarifies that statutory auditors have a mandatory obligation to report suspected fraud to the Central Government under Section 143(12) of the Companies Act, 2013, even if the management or Board denies the existence of such fraud. It reinforces auditors’ duty to maintain professional skepticism, independence, and not be influenced by the company’s legal opinions when evaluating and reporting fraud. The Circular also emphasizes that resignation from the audit engagement does not relieve auditors of their reporting responsibilities.

[6] CARO 2020 specifically requires auditors to report on: (i) whether any fraud by the company or on the company has been noticed or reported during the year; (ii) the nature and amount of such fraud, if any; and (iii) whether the auditor has considered whistleblower complaints, if applicable.

[7] The Ministry of Corporate Affairs (MCA) is a government ministry in India responsible for the regulation and administration of corporate sector laws, primarily governing companies, limited liability partnerships, and other entities registered under the Companies Act, 2013 and related legislation. The MCA oversees corporate compliance, promotes good corporate governance, and implements policy reforms pertaining to the corporate sector.

[8] If the Board or Audit Committee responds, the auditor must file Form ADT-4 within 15 days of receiving the reply. If there is no response, the 15-day filing period begins after the 45-day window has expired. This means the maximum possible timeline for the auditor to complete the reporting process is up to 62 days (2 days to notify the Board/Audit Committee, up to 45 days for their response, plus 15 days for filing), depending on when the Board/Audit Committee responds, as per Section 143(12) of the Companies Act, 2013 and related rules.

[9] The legal requirement is that the committee should be independent enough to conduct an unbiased investigation. In some companies, especially smaller ones with fewer independent directors, this might not be practically possible to have exclusively independent directors.