In this note: What a company should do after discovering employee fraud: preserve evidence, assess potential civil and criminal claims, consider police complaints and reporting duties, coordinate disciplinary and criminal proceedings, and pursue recovery.
The first days after a company discovers employee fraud often decide whether the money can be traced and the case proved. This note walks through the main steps in the order a legal head will usually face them, and the provisions that govern each one.
- Secure the evidence before anyone is confronted.
- Decide whether the loss is a civil dispute or a crime.
- File the complaint, and know how to escalate if the police do not register it.
- Check the reporting duties that run alongside the complaint.
- Run the disciplinary inquiry and the criminal case together.
- Plan for recovery from the start.
Secure the evidence first
Preserve emails, ledgers, bank statements, vouchers and the devices on which they sit, and restrict the access of the person concerned. Do this quietly and before the person is confronted or suspended, so that nothing is deleted or altered. An electronic record is ordinarily admitted on a certificate under Section 63(4) of the Bharatiya Sakshya Adhiniyam, 2023, which identifies the device and the source of the record and carries the hash value of the file. A record exported without that certificate can be difficult to rely on at trial. Keep the original records and their metadata, and a log of who collected what and when.
Is it a civil dispute or a crime?
Not every loss is a criminal offence. A failure to pay, or a breach of a contract, is ordinarily a civil matter. Criminal law is engaged where the material shows dishonest intention. Criminal breach of trust under Section 316 of the Bharatiya Nyaya Sanhita, 2023 needs entrustment of property, or dominion over it, and its dishonest misappropriation or use. Cheating under Section 318 needs deception and a dishonest or fraudulent inducement. Police and courts look for facts that show dishonesty, and a complaint that reads as a commercial grievance is often closed or quashed.
Making the complaint
Where the complaint discloses a cognizable offence, the police must register an FIR (section 173(1) of the Bharatiya Nagarik Suraksha Sanhita, 2023). For offences punishable with three years or more but less than seven, section 173(3) allows the officer in charge, with the prior permission of an officer not below the rank of Deputy Superintendent of Police, to hold a preliminary enquiry within 14 days. In commercial cases, expect some hesitation. Draft the complaint so that it reads as a crime and not as a recovery claim: who did what, which document or statement was false, how the money moved, and the loss in figures.
If the station still holds back, there is a written route upward. The complaint goes first to the Superintendent of Police (section 173(4)) and then to the Magistrate (section 175(3)), with a copy of the first application and a supporting affidavit, and the Superintendent step must come first (Om Prakash Ambadkar v. State of Maharashtra, 2025 INSC 139). Our note on forged expense claims follows that route in detail, including how far a preliminary enquiry under section 173(3) is open in the commonest cheating and forgery cases.
Statutory reporting duties
Under Section 143(12) of the Companies Act, 2013, read with Rule 13 of the Companies (Audit and Auditors) Rules, 2014, an auditor who has reason to believe that an offence involving fraud is being or has been committed against the company by its officers or employees must report it. Where the amount involved is ₹1 crore or more, the report goes to the Central Government after the Board or Audit Committee has been told. Below that amount, it goes to the Audit Committee or the Board. The rule also sets time limits for each step. Listed companies may also have disclosure obligations to the stock exchanges. These duties run alongside any police complaint and should be assessed separately.
Can disciplinary and criminal proceedings run together?
A company may proceed with a departmental inquiry while a criminal case is pending, and the two can run together. A stay of the inquiry may be desirable where the criminal charge is grave, involves complicated questions of law and fact, and rests on the same facts. The inquiry cannot be held up for long, and if the criminal case is unduly delayed it can resume (Captain M. Paul Anthony v Bharat Gold Mines Ltd., (1999) 3 SCC 679).
How can the money be recovered?
Section 107 of the BNSS lets a court attach property believed to be proceeds of crime, on an application by the investigating officer with the prior approval of the Superintendent or Commissioner of Police. The court may issue a notice to show cause within 14 days, but may attach without notice in the interim where notice would defeat the object of attachment. Proceeds of crime are distributed among those affected by the offence, and any balance is forfeited to the Government. Attachment is not a decree for recovery, and the amount ultimately restored depends on what is traced and on the outcome of the case.
In short: preserve the evidence quietly, decide early whether the facts show a crime, file a complaint that reads as one, and run the reporting, disciplinary and recovery steps together rather than one after another.
Image credit: illustrative image generated with AI.
General information only, not legal advice. Reading this note creates no advocate-client relationship, and no responsibility is accepted for action taken in reliance on it. The law changes and outcomes depend on the facts, so please take specific advice before acting. See the Disclaimer.