A forensic audit in India is a specialized examination and evaluation of a company’s or individual’s financial records to derive evidence that can be used in a court of law or legal proceeding. It goes beyond traditional auditing by integrating accounting, auditing, and investigative skills to identify, analyse, and report financial frauds and irregularities. Here’s a detailed explanation tailored to the Indian context:
What Is a Forensic Audit?
A forensic audit is a process of investigating financial statements for signs of fraud, embezzlement, money laundering, or financial manipulation. It is typically ordered when there is a suspicion or allegation of financial misconduct.
Legal and Regulatory Framework in India
- Companies Act, 2013:
- Section 212: Investigation by (SFIO)
- Section 143(12): Mandates auditors to report frauds to the central government.
- Section 210: The Central Government can order a Serious Fraud Investigation Office (SFIO) investigation.
- SEBI (Securities and Exchange Board of India):
SEBI may order forensic audits for listed companies in case of irregularities or whistleblower complaints. - Reserve Bank of India (RBI):
Directs banks to conduct forensic audits in cases of loan defaults, especially for non-performing assets (NPAs) above a certain threshold. - Enforcement Directorate (ED), CBI, and Income Tax Department:
May rely on forensic audits for evidence in financial crimes.
Objectives of Forensic Audit
- Detect and prevent financial fraud
- Identify asset misappropriation
- Uncover manipulation of financial statements
- Trace fund flows and locate assets
- Provide litigation support
- Assist in dispute resolution (shareholder, contractual, etc.)
Common Tools and Techniques
- Data analytics and forensic software (e.g., ACL, IDEA)
- Interviews and interrogation
- Email and digital forensics
- Bank statement and fund flow analysis
- Benami transaction detection
- Ratio and trend analysis
Who Conducts Forensic Audits?
- Chartered Accountants (CAs) with specialization in forensic auditing
- Firms registered with the ICAI or empanelled with regulators like SFIO or SEBI
- Forensic auditors may also hold certifications like Certified Forensic Accounting Professional (CFAP), CFE (Certified Fraud Examiner), etc.
Procedure of a Forensic Audit
- Planning and Scoping – Define objectives, scope, and timelines.
- Evidence Collection – Review documents, emails, contracts, transactions, etc.
- Analysis – Use forensic techniques to identify irregularities.
- Reporting – Provide a detailed report including findings, evidence, and recommendations.
- Legal Proceedings – Testify in courts or regulatory hearings if required.
Use Cases in India
- Bank frauds (Eg., Nirav Modi-PNB sc am)
- Corporate governance failures (e.g., Satyam Computers scandal)
- Shareholder or partnership disputes
- Insurance fraud detection
- Bribery and corruption investigations
Admissibility in Court
Forensic audit reports are often used as evidence in legal proceedings. The credibility depends on:
- The qualifications and independence of the auditor
- Proper documentation and chain of custody
- Compliance with Indian Evidence Act provisions
Increasing Importance
Post-2015, the demand for forensic audits in India has grown significantly due to high-profile financial frauds, rising NPAs, and tighter regulatory scrutiny. Regulators are increasingly relying on forensic reports for decision-making and prosecutions.
