“Eliciting verifiable evidence from the recalcitrant borrower is an Art, churning conclusive evidence is a Science; disseminating fraud from inferences is Forensic Audit.”
September 2017 onwards, the Indian Bankers Association (IBA) has been impaneling Forensic Auditors for disseminating diversions of funds in Corporate Loans. The empaneled list contains two categories, first who conduct Forensic Audit of loans below Rs.50 cr and the second for loans for Rs.50 crores above. The same firm can do both audits. The minimum criteria to be on the list is experience in Forensic Audit and a clean track record of fifteen years as a Chartered Accountant.
A large number of frauds came out since the initiation of this step by IBA. Enthused by the success, RBI has mandated banks to conduct Forensic Audits of all borrowers enjoying bank funding of Rs. 50 cr and above.IBC guidelines for Resolution of Stressed Assets have made Forensic Audit mandatory to unearth the reasons for sickness in the account. The specter of Forensic Audit has brought in the requisite semblance in the accounting discipline of corporates. The audit has a beneficial effect on the reduction of NPAs in Corporate segment.
A forensic audit analyzes a company’s financial records to extract facts, which a court of law can use. The Audit is conducted to prosecute a party for fraud, embezzlement, or other financial crimes. An organization is subjected to Audit if ethical lapses have occurred and the organization doesn’t follow the prescribed policies and procedures. Compliance with laws and regulations is significantly ignored, and there are IT data breaches, suspicious fraud, and theft. A forensic audit is also conducted if a whistleblower identifies and highlights stolen asset issues, defalcations, and accounting fraud.
The forensic Audit is similar to a traditional financial audit: planning, gathering evidence, writing a report with a possible appearance in court. Audit and Forensic Audit’s main difference is that Audit guarantees that the checked financials are factual, fair, and reasonable. Forensic Audit analyzes and investigates audited statements to find whether the same are authentic, unbiased, and based on facts. Forensic audit investigations are essential to uncover the modus operandi of corporate misdoings like embezzlement, bribes, extortion, fictitious transactions, kickbacks, and conflict of interest.
Forensic auditing is a specialty accounting. It draws on experience in accounting and auditing practices and expert knowledge of legal frameworks covering a large spectrum of investigative activities. Forensic Audit is also used in situations that do not involve financial fraud, such as bankruptcy filing disputes, closures of businesses, and separations. Forensic audit investigations expose illegal activities. Instead of a standard audit, a forensic audit is used if there is a possibility that the evidence gathered would be used in court.
1. A forensic audit comprises the following FIVE steps:
1.Planning the Investigation: The forensic auditor team plans investigation techniques to meet the objective of unmasking layering.
2.Collecting Evidence: Sufficient evidence is gathered to prove in court the identity of the fraudsters, reveal details of the fraud scheme, and calculate the financial loss suffered and the parties affected by fraud. The auditor collects verifiable evidence to support his report.
3.Reporting: A forensic audit prepares a written report on the crime to the Bank to file a legal case.
4.Court Proceedings: The forensic auditor is present to clarify the evidence collected and identify the suspects during court proceedings.
5.Forensic Audit a Science & Art: During 72 forensic audits conducted by my team, I found the evidence collection as an art because the culprit rarely cooperates,destroys the shreds of evidence, cleans up hard disks, and extinguishes exhibits before the commencement of Forensic Audit. Art of persuasion works here to accumulate data for scientific analysis.
2. Forensic Audit of a typical corporate in India is conducted on the following NINE parameters:
1. Overview: Here, the details of the assignment are discussed. Names of banks who have ordered the Forensic Audit and the target corporate are disclosed. The scope of forensic Audit is also stipulated.
2. Executive Summary: The findings are briefly disclosed here. A clear, verifiable, and conclusive opinion is given, stating whether fraud has happened or not.
3. Methodology/Approach for Forensic Audit: How the Audit was conducted, who was interviewed, what places were visited, which bank files were examined, and which public and statutory domains were accessed to cull evidence are discussed here.
4. Experts involved in the Forensic Audit: Names and qualifications of audit team members disclosed here.
5. About the Corporate under Forensic Audit: Here, the history and track record of promoters and corporate under Audit are discussed.
6. Limits availed by the Borrower Entity: Entire Fund and Non-Fund Limits sanctioned and outstanding mentioned here.
7. Financial Performance: Last two years’ performance before the account becomes NPA are is enumerated here.
8. Status of Non-Current/Current Assets: Verification of assets of the company is done, and findings are mentioned here along with values.
9. Findings: This is the most crucial portion discussed in detail. Elaborate due diligence of transactions is done to reveal the intention of the promoter. The Related Party transactions are examined minutely.
3. Forensic Audit compartmentalizes findings in TWELVE chapters, to reveal the delinquencies committed by Borrower:-
Chapter-1: Accounting and Internal Control system
Whether books are updated on contemporary fool-proof software or manual books are maintained for manipulation.
Chapter-2: Analysis of Related Parties
Ascertains whether funds are round-tripped through Related Parties.
Chapter-3: Examination of Promoter’s Contribution & Transactions with Proprietor/Related Parties
Ascertains whether Capital of the promoter is created through the circular movement of loans through Related Parties.
Chapter-4: Examination of transactions of Borrower
Whether unwarranted drawings/non-business withdrawals made.
Chapter-5: Examination of Purchase and Sales
Ascertains whether Sales are fictitious to counter fictitious purchases.
Chapter-6: Examination of Expenses
Non-business-related expenses are highlighted here.
Chapter-7: Stock Analysis
Redundant and Non-moving stock disclosed here.
Chapter-8: Examination of Trade Receivables
Enumerate here veracity of Receivables of actual movement of goods.
Chapter-9: Examination of advances
Reveals whether advances made in cash for the purchase of machinery and raw material?
Chapter-10: Correspondence with Borrower
Whether timely reminders for loan servicing sent to Borrower?
Chapter-11: Disclaimer
A Disclaimer is essential for the Forensic Audit report as inference is based on the evidence available during the Audit only, and subsequent revelations may impact the result.
Chapter- 12: Appendix
The Appendix contains exhibits supporting conclusive evidence.
Forensic Audit is a painful pill necessitated in the present day of crashing of large corporates. The auditor must furnish a conclusive report within the given timelines. If the information discloses a fraud, then the Bank reports to the Reserve Bank of India through the Fraud Monitoring Cell of the Bank within a week without fail.
Rightly said,” The two most essential things in any company that don’t appear in its balance sheet are: its reputation and its people. The Forensic Audit helps reveal them both.
About the author
Mr. Hargovind Sachdev is an Ex-Banker, GM(Retd) of State Bank of India. Has over 39 years of experience in banking, having occupied senior positions in UCO Bank, United Bank of India,State Bank of Patiala, State Bank of Travancore & State Bank of India where he headed the Central European Credit Desk at Frankfurt,Germany from 2006 to 2011 covering 15 countries of Central Europe.Has undergone International Banking Training from Asian Institute of Management, Manila, Philippines in the Year 2003 and a Multi-currency lending-technique training at the Euro Money Institute, London in 2009.
He has specialisation in Credit, Foreign Exchange,Vigilance, Monitoring & appraisal of Corporate Loans, MSME Credit,Gold Loans, Agricultural Loans & NRI Business Management in assets & liabilities. As a Forensic Auditor, he has conducted various Transaction Audits allotted by Banks.
He was felicitated by the Central Vigilance Commissioner , Sh. C.V Chowdhry for winning first prize for best article on Preventive Vigilance in 2015. He is also an accomplished Public Speaker hav-ing conducted multiple Motivational Seminars for institutions like ONGC, National Housing Bank & Bank of Baroda. He is an Inde-pendent Director & consultant to various big entities in corporate sector at present.
