# Auditor Acting in a Fraudulent Manner

## When This Section Applies

When NCLT is satisfied that an auditor has:

Acted in a fraudulent manner, OR
Abetted or colluded in any fraud by or in relation to the company or its directors/officers.

## Who Can Trigger NCLT Action?

NCLT may act:

Suo motu (on its own), OR
On an application by the Central Government, OR
On an application by any concerned person.

## NCLT's Power

NCLT may direct the company to change its auditors.

## Special Fast-Track When CG Applies

If the application is made by the Central Government, NCLT shall — within 15 days of receipt of the application — pass an order that such auditor shall not function as auditor. The CG may then appoint another auditor in his place.

## Consequences for the Errant Auditor

An auditor against whom a final order is passed by NCLT:

1. Cannot be appointed as auditor of any company for 5 years from the date of the order.

2. Shall also be liable under Section 447 (fraud — imprisonment 6 months to 10 years and fine).

## Why Two Tracks?

The ordinary track gives NCLT time to assess; the CG-triggered fast-track exists because if the regulator itself flags fraud, the auditor cannot be allowed to continue auditing while the matter is examined — interim removal is automatic.

Worked example

### Example 1

Q. CG files an application before NCLT on 1st April 2026 alleging that Mr. F, auditor of A Ltd., colluded with directors to inflate revenue. By when must NCLT pass an order regarding Mr. F's functioning, and what is the consequence after the final order?

A. Since CG made the application, NCLT must — within 15 days, i.e., by 16th April 2026 — order that Mr. F shall not function as auditor. CG may appoint another auditor in his place. On final order by NCLT, Mr. F is barred from auditing any company for 5 years and is liable under Section 447.

⚠️ Common exam mistakes

Assuming only CG can trigger NCLT action — any concerned person can apply, and NCLT can also act suo motu.
Forgetting the 15-day fast-track that applies only when CG makes the application.
Limiting the disability to the offending company — the 5-year ban extends to all companies.
Missing the additional liability under Section 447.

Bare-Act text Section 140(5) · Companies Act, 2013 · click to expand

Without prejudice to any action under the provisions of this Act or any other law for the time being in force, the Tribunal either suo motu or on an application made to it by the Central Government or by any person concerned, if it is satisfied that the auditor of a company has, whether directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers, it may, by order, direct the company to change its auditors.

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Auditor Acting Fraudulently — NCLT Direction [Section 140(5)]

Worked example

⚠️ Common exam mistakes