Forensic audit is the application of investigative and auditing skills which can be used to examine evidence usable in a court of law.

1. FORENSIC AUDIT
BY NIKHIL PRIYA AND PROF. DS RAY

2. INTRODUCTION
A Forensic Audit is an examination of a company’s financial records to derive evidence which can
be used in a court of law or legal proceeding. A forensic audit can reveal fraud cases. It is the
combination of auditing, investigation skills used to examine evidence which can be produced in a
court of law. A forensic audit may be conducted to prosecute a party for fraud, embezzlement, or
other financial crimes. In today’s business, there has been an increasing demand for forensic
auditors as the number of misappropriation frauds are in full swing in corporate as well as
government entities.

3. THINGS INVESTIGATED IN A FORENSIC AUDIT
• Corruption
• Asset Misappropriation
• Financial Statement Fraud (FSF)

4. HOW IS FORENSIC AUDITING INVESTIGATION
CONDUCTED?
• Accepting the Investigation
• Planning the Investigation
• Gathering Evidence
• Reporting
• Court Proceedings

5. WHAT IS THE REGULATORY STANCE ON
FORENSIC AUDITS?
• Reserve Bank of India
• Enforcement Directorate (ED)

6. HOW CAN FORENSIC AUDITS PREVENT
GENERATION OF NON-PERFORMING ASSETS IN
BANKS?
A non-performing asset (NPA) refers to a classification for loans on the books of financial
institutions that are in default or are in arrears on scheduled payments of principal or
interest. In most cases, debt is classified as non-performing when loan payments have not
been made for a period of 90 days.” The problems that a bank face while dealing with NPA
can be summed up as follows:
• It reduces the cash flow of that particular bank, as it all depends on the cycle of lending
and repayment.
• The reduction in cash flow directly hits on the overall capital that is available to the
bank to give subsequent loans.
• Also, the earnings of the bank are solely based on the repayment of loans it has lent.
The loss caused by NPAs are set off against the earning, ultimately reducing the earning
and credibility of the bank.

7. WHAT ARE THE LEGAL CONSEQUENCES THAT A PERSON
WILL ATTRACT IF HE/SHE IS CAUGHT IN A FORENSIC
AUDIT?
In order to understand the legal consequences that a person attracts on being caught in a forensic audit, it is
necessary to know about the various statutes that talk about the implementation of forensic audits in India.
• Sections 235 and 237 of the Companies Act, 1956- Empowers the Central Government to inspect
the books of accounts of a company, to direct special audit, to order an investigation into the affairs of
a company and to launch prosecution for violation of the provisions of the Act.
• Provisions of Sick Industrial Companies Act incorporated into the Companies Act, 1956-
• The Section 424A(5) of the Companies Act, 1956 empowers National Company Law Tribunal
(NCLT) to examine as a preliminary issue whether the company is a sick industrial company u/s.
2(46AA).
• Section 424B of the Companies Act, 1956 empowers the tribunal to make such inquiry as it may
deem fit for determining whether any industrial company has become a sick industrial company.
• SEBI Act, 1992- Regulation 11 C of the SEBI Act, 1992 empowers the SEBI to direct any person to
investigate the affairs of intermediaries or brokers associated with the securities market whose
transactions in securities are being dealt with in a manner detrimental to the investors or the securities
market.
• Insurance Act, 1938- Section 33 of the Act empowers the IRDA to direct any person (Investigating
Authority) to investigate the affairs of any insurer.
• Prevention of Money-Laundering Act, 2002– Section 3 of the Act defines the offence of money
laundering as the involvement of a person in any process or activity connected with the proceeds of crime
and projecting it as untainted property, where the scope of integrating forensic audits can be clearly seen.
• The Companies (Auditor’s Report) Order, 2003- The Act requires the auditor to report to the effect
that if a substantial part of fixed assets have been disposed of off during the year, whether it has affected
the going concern status.

8. HOW CAN WE REDUCE LIABILITY AND INSTANCES
OF FRAUD?
• It is highly recommended that companies harbour a “stop before it starts policy” by
creating a transparent working environment.
• Employ teams to conduct a frequent analysis of the fraud triangle keeping in view the
working atmosphere in the company.
• Come up with policies to work on the ‘rationalisation’ aspect of the fraud triangle to
strike at the root of the problem.
• Follow a dynamic approach while defining fraud in the company transactions keeping in
mind the ongoing scenario of white collar crimes.
• The institution of strong internal controls and anti-fraud technologies in the electronic
platform.
• Thorough and frequent evaluation of the company’s code of conduct.
•

9. FORENSIC AUDIT AND YES BANK
Yes Bank, which is facing serious doubts on its survival even as it undergoes resolution through
RBI’s scheme, must undergo a forensic audit to enhance confidence among its potential investors,
experts said.
The Yes Bank’s board was last week superseded by Reserve Bank amid deteriorating financial
health. The RBI put a moratorium on the lender till April 3, placed administrator and restricted
operations at the bank.
Subsequently, the regulator also rolled out a resolution scheme for Yes Bank, under which the
country’s largest state-run lender, SBI will buy up to 49% share in Yes Bank at Rs 10 per share,
and seek other potential investors, including lenders, private equity players and foreign financial
institutions.

10. THANKING YOU!