Govt to announce forensic auditing norms, bring clarity in fraud detection

Standards used now are not clear, resulting in hundreds of cases across India courts filed by borrowers, companies and individuals

The government will soon announce new forensic accounting standards for default accounts. The move was necessitated after forensic audits on some accounts were classified as fraud by one bank while the same account was classified as non-fraud by another.

According to a source, the Ministry of Corporate Affairs will shortly notify the new standards, which will be applicable to all auditors conducting forensic accounting for banks. Such audits are done to comply with the various Reserve Bank of India (RBI) circulars on non-cooperative borrowers, wilful defaulters and fraud classification. 

Also, the Insolvency and Bankruptcy Board of India will use the same standards to conduct forensic audits of bankrupt companies. 

Auditors lauded the move, saying it will help to have standard norms. “It is a welcome move. This will set the standard guidelines for professionals in carrying out the assignment and maintaining the necessary documentation,” said Mahendra Chhajed, senior partner of Chhajed & Doshi, and a leading ICAI certified forensic & fraud detection professional.  “Earlier, there have been questions on the conclusions arrived at by the forensic professionals. However, after these standards are issued, there would be more consistency in reporting,” he added.

Corporate lawyers said courts across India are saddled with hundreds of cases filed by borrowers, companies and individuals objecting to forensic audits. 

In December last year, the Telangana High Court had said the declaration of an account as “fraud” in line with the RBI’s circular on fraud classification by banks, without following the principles of natural justice, is arbitrary and illegal. This order was later challenged by State Bank of India and other banks in the Supreme Court.

The RBI is also in the process of filing an appeal against the HC order. The Supreme Court will hear this matter on March 26. The apex court in an earlier order had asked banks to follow the principles of natural justice while seeking to classify an account as a “wilful defaulter”. 

Lenders generally declare an account as ‘wilful defaulter’ or ‘fraud’ based on a report of a forensic auditor appointed by the banks. 

However, as of today, there are no prescribed forensic standards which mandate or guide how an auditor is required to approach any particular set of transactions before it. In the case of DHFL, an auditing firm gave a clean chit to the company but later Grant Thornton detected frauds worth Rs 15,000 crore in the books. 

Thus, the Institute of Chartered Accountants of India is seeking to introduce a set of forensic accounting standards which would need to be applied to evaluate and investigate the transactions in question. The Supreme Court will also clarify on the fate of accounts which are already declared frauds by banks.