Companies Act Section 147

Companies Act Section 147- Punishment for Contravention of Audit-Related Provisions

Section 147 of the Companies Act serves as the penalty clause covering violations of the provisions contained in Sections 139 to 146. These sections establish the rules related to the appointment, powers, duties, qualifications, disqualifications, reporting responsibilities, and attendance obligations of company auditors.

This section establishes a clear framework for penalties that can be imposed on the company, its officers in default, and the auditor (whether an individual auditor or an audit firm) if they fail to comply with the applicable provisions.

It also goes a step further to address situations where fraudulent intent is established, thereby escalating the penalties to include imprisonment, higher fines, and compensation liabilities.

Sub-section (1): Penalty for Company and Officers for Contravention of Sections 139 to 146

The first sub-section specifies the penalties that apply to both the company and its officers in default if any of the provisions under Sections 139 to 146 are violated.

These provisions primarily deal with:

Auditor appointment and reappointment (Section 139).

Eligibility and qualifications of auditors (Section 141).

Auditor’s rights, duties, and powers (Section 143).

Restrictions on providing certain non-audit services (Section 144).

Signing of audit reports and certification of documents (Section 145).

Auditor’s obligation to attend general meetings (Section 146).

Penalties on the Company

If any of these provisions are contravened, the company itself will be liable for a fine ranging from:
Minimum Fine: ?25,000
Maximum Fine: ?5,00,000

Penalties on Officers in Default

Additionally, every officer of the company who is responsible for the default (commonly referred to as "officers in default") will be individually liable to pay a fine ranging from:
Minimum Fine: ?10,000
Maximum Fine: ?1,00,000

Sub-section (2): Penalty on Auditors for Specific Contraventions

This sub-section imposes penalties directly on the auditor if they contravene any of the critical provisions related to their appointment, reporting, or permitted services under:

Section 139 (Appointment of auditors).

Section 143 (Powers and duties of auditors).

Section 144 (Prohibition on rendering certain non-audit services).

Section 145 (Signing and certification of audit reports and documents).

Penalties on the Auditor

The auditor (whether an individual auditor or an audit firm) will face a fine ranging from:
Minimum Fine: ?25,000
Maximum Fine: ?5,00,000 OR
Four times the remuneration received by the auditor, whichever is lower.

Aggravated Offence - Intentional or Fraudulent Contravention

If the auditor is found to have knowingly or willfully violated these provisions with the intent to deceive the following stakeholders:

The company.

Its shareholders.

Its creditors.

Tax authorities.

The penalties escalate significantly, including both imprisonment and heavier fines.

Imprisonment: Up to 1 year.
Fine: Between ?50,000 and ?25,00,000 OR 8 times the remuneration received, whichever is lower.

This heightened penalty reflects the seriousness of fraudulent intent, particularly where auditors act in collusion with management to conceal financial irregularities, deceive stakeholders, or mislead statutory authorities.

Sub-section (3): Liability to Refund and Compensate for Losses

If an auditor is convicted under sub-section (2) (for deliberate or fraudulent contravention), they will be further required to:

Refund all audit fees or remuneration received for the audit engagement in question back to the company.
Pay compensation for damages suffered by any of the following:

The company itself.

Statutory bodies or regulatory authorities (such as tax authorities or the Registrar of Companies).

Members (shareholders) of the company.

Creditors of the company.

The compensation is for any loss arising from false, misleading, or incorrect statements made in the audit report. This ensures that auditors not only face regulatory penalties but also bear the financial consequences of their misconduct.

Sub-section (4): Central Government Oversight for Compensation Payments

The Central Government is empowered to designate a statutory body, authority, or officer responsible for ensuring that the compensation payments ordered under sub-section (3) are made to the relevant parties.

This ensures that the process of compensating the affected parties (company, shareholders, creditors, or statutory bodies) is monitored and enforced by a competent authority.

Once the payment is made, the designated authority will have to submit a report to the Central Government, documenting:

The amount paid.

The parties compensated.

Any other relevant details, as specified in the official notification.

Sub-section (5): Liability of Audit Firms and Partners

In cases where the audit was conducted by an audit firm, and it is proved that the firm’s partner(s) either:

Acted fraudulently.

Abetted (assisted) or colluded with management, directors, or officers in committing fraud related to the company.

The liability for such misconduct, whether civil liability (compensation claims) or criminal liability (fines, imprisonment), will apply jointly and severally to:

The partners who committed the act.
The audit firm as a whole.

This ensures that audit firms cannot shield themselves from liability by blaming individual partners. Both the firm and the partners involved bear collective responsibility.

Proviso- Limitation on Criminal Liability for Firms

However, the law makes an exception for criminal liability involving imprisonment or non-monetary penalties. In such cases, only the individual partners responsible for the fraudulent act (or collusion) will be subject to criminal penalties.

The audit firm itself may still face monetary fines, but the personal liberty and criminal records of innocent partners who were not involved in the fraud will not be affected.