GROWING NEEDS OF FORENSIC AUDIT IN CORPORATE AND BANKING FRAUDS IN

INDIA

Abstract

With the gradual rise in money laundering and wilful default cases, RBI has made
forensic audit mandatory for large advances and restructuring of accounts. In the
present administrative system post Modi regime, no domain is spared from immoral
misconduct, fraudulence and injustice. According to a joint study conducted by
ASSOCHAM and Grant Thornton, corruption, money laundering, tax evasion, window
dressing, financial reporting fraud and bribery are the most common corporate frauds
occurring in India Inc. The study revealed that nearly half of corporate frauds have
taken place in real estate and infrastructure in the last two years followed by financial
services sectors recording 34% frauds.

Scandals in accounting have grown in the last two decades and have put a question
mark in corporate governance, role of company secretaries and auditors. The scandals
occurred in this 21st century are also putting question on monitoring role of regulators
also in some cases.

Restoring stake holders’ confidence back in the financial reporting process and
corporate governance is also a challenge in view of these developments. Further, the
lengthy legal processes also help the criminal companies and borrowers to play with
public money as long as they like. Consortium loan process should not be so conducive
to give rise to get huge money without security and an easy game to play with public
money. Forensic accounting helps the government, regulators and all stakeholders of
the companies to have a confidence in dealing with such corporate.

Keywords:

Corporate Governance, Auditing, Financial Statement, accounting, accounting frauds,

forensic

Electronic copy available at: https://ssrn.com/abstract=3624001

 GROWING NEEDS OF FORENSIC AUDIT IN CORPORATE AND BANKING FRAUDS IN
INDIA

With the gradual rise in money laundering and wilful default cases, RBI has made
forensic audit mandatory for large advances and restructuring of accounts. In the
present administrative system post Modi regime, no domain is spared from immoral
misconduct, fraudulence and injustice. According to a joint study conducted by
ASSOCHAM and Grant Thornton, corruption, money laundering, tax evasion, window
dressing, financial reporting fraud and bribery are the most common corporate frauds
occurring in India Inc. The study revealed that nearly half of corporate frauds have
taken place in real estate and infrastructure in the last two years followed by financial
services sectors recording 34% frauds.
Business ecosystem has become increasingly complex due to the rising number of
business-related investigations. The need for transparency and accountability is
imperative and the demand for forensic accounting is greater than ever. Forensic
accounting and forensic audit are complementary to each other, as more the meticulous
the forensic accounting in general, less the need of forensic audit.

It is difficult to blame the control measures at the bank’s level for credit control, as the
banks have all the meticulous guidelines on the pre sanction stage and post sanction
follow up stage, guidelines on the ethics for the persons involved in these two
processes, creation of committees for credit dispensation at various levels of hierarchy
of any bank, but what happens during the pre sanction stage is a big challenge to the
investigating agencies. Rather, after the creation of committees, the picture seems to
have become grimmer. Further, the new types of tactics being adopted by the big
borrowal accounts are also a big challenge for the banks.

Nevertheless, the field of forensic audit is still in its nascent stage in India, which makes
the forensic audit a growing area of need in all such domains of operation in any
corporate structure and mainly in banking industry in India. The investigating agencies
in India are also in dire need of more knowledge to its investigating officers in this field.

COMPARATIVE DATA OF FRAUD IN INDIA-SECTOR WISE -2018 & 2019

If we analyse the data in table below, we find that in terms of the number of frauds,
number related to advances were predominant followed by card/internet-related frauds
and deposits related frauds. Frauds relating to card/internet and deposits constituted
only 0.3 per cent of the total value of frauds in 2018-19.

Electronic copy available at: https://ssrn.com/abstract=3624001

Electronic copy available at: https://ssrn.com/abstract=3624001
WHAT GOES WRONG IN BANKING AND CORPORATE SECTOR

(Above figure is extract of a survey shown by Deloitte April2015)

Survey clearly shows that the fraudulent activities are happening in big corporate which
constitutes major percentage of diversion of funds and siphoning of funds, besides
furnishing of false data and inflated financial figures.
Similarly, in retail banking, which constitutes mainly the house loans, car loans and
personal loans, the fraudulent activities are found for fraud documentation furnished by
the borrowers to the banks, thereby acting in a malafide manner, besides misstatement
of financial figures etc.

Electronic copy available at: https://ssrn.com/abstract=3624001

(Consolidated data from different sources)

In above table, we find that a sizable amount of NPA accounts for more than 1 lac,
which constitutes consortium advances. NPA in on a regular increase every year since
2014 and is a cause of concern.

WHY FORENSICS IN BANK FRAUDS /CORPORATE FRAUDS

Every bank is enough equipped with a qualified audit team of internal auditors, an
established audit /inspection department and a robust network all around the branch
network, team of external chartered accountants retainers at required levels. Besides,
regulator RBI, and concerned ministry also keeps a control on state of affairs through a
number of measures and guidelines. CVC also at many times has warned the financing
institutions specially banks to be fair in their dealings. Further, banks have a basket of
circulars, guidelines for a moral and ethical conduct at the time of dispensation of credit
at all stages.
It is very astonishing that inspite of all cited control measures, the NPA and fraud in the
credit portfolio are on the rise every year. Investigations are many times done by CBI
because of the magnitude of fraud amount or many times the other agencies are
involved like ED, EOW, income tax etc. because of other complicated activities like
money laundering, tax evasion etc.
Bankers are working in a good faith with its customers and its prospective borrowers. It
is not true that, all the times bank personnel are at fault, or it happens because of
immoral behavior of dealing bankers. In many cases, the potential borrowers have
acted with malafide intentions with bankers viz.

1. Furnishing of fraudulent financial data to bankers to avail credit facilities.

2. Furnishing of inflated financial data to avail higher credit than required.

Electronic copy available at: https://ssrn.com/abstract=3624001

 3. Uploading of wrong financial data by company in MCA records to fool the
appraising officers of bank.
4. Re uploading of financial data in MCA records by companies, which is showing
loss or lesser profits to misguide appraising officers of banks.
5. Furnishing of fake documents of immovable properties for procuring credit
facilities.

Besides all these maneuvers by the borrowers at pre sanction stages, the malafide list
also extends post sanction and during the tenure of loan,viz.

1. Misutilising the financed money for purposes other than it is agreed.

2. Siphoning of funds to other sister firms.
3. Siphoning of funds to shell companies.
4. Utilising lent money to pay for kickbacks to lenders.

Besides, above there have been found a number of other tactics being adopted by the
borrowers to fool the lenders/bankers, defraud the public and other stakeholders. Some
examples are IL&FS, PMC bank, yes bank scandal. On the other side, Neerav Modi case
clearly shows connivance of bank staff in the fraud.

SCOPE OF FORENSIC ACCOUNTING

1. Find evidence of unusual development in the accounting and financial systems.

2. Design accounting processes for verifying important premises and data. A forensic
accounting orientation also calls for skills in identifying possible fraud.
3. Perform forensic type processes on a routine schedule in order to reduce fraud
perpetration and transaction risks.
4. Cover all types of business organizations that require regular or continuous
surveillance of all transaction processing systems.

RELEVANCE OF FORENSIC ACCOUNTING

1.Assessing working transactions for compliance with basic operating processes and

agreement

2.Performing thorough scrutiny and examination of financial payment dealings in the

accounting system to decide if they are standard or beyond company policy.

3. Assessing procedure for likely unlawful tampering or falsification of information or

Electronic copy available at: https://ssrn.com/abstract=3624001

accounts and its consequences on the ensuing financial accounts.

4. Helping in estimating the economic damages and the ensuing insurance demands

that arise from catastrophes such as fires or other natural setbacks.

Forensic findings in IL&FS

IL&FS Financial Services, a group company, defaulted in payment obligations of bank

loans (including interest), term and short-term deposits and failed to meet the
commercial paper redemption obligations due on September 14. The defaults
by IL&FS have shut it out of the market, leaving it at the mercy of shareholders.

The audit evaluated the role of the various credit rating agencies on various debt
instruments and facilitating excessive borrowings from money markets across group
companies that eventually led to defaults.
The report has analyzed several email communications between the erstwhile
management and the representatives of credit rating agencies during the specified
period.

The findings of the forensic audit by consultancy Grant Thornton of IL&FS

Transportation Networks India Limited (ITNL) shed new light on events that led to the
financial ruin of IL&FS, which committed a number of defaults and roiled India’s shadow
banking sector due to consequent concerns of a larger bad debt crisis. The government
was finally forced in 2018 to replace the IL&FS management with a team led by banker
Uday Kotak.

ITNL’s business model is simple on paper — it procures government contracts of

marquee projects and subcontracts to eligible firms. BOT operators typically choose
sub-contractors that are financially strong, have efficient execution capabilities and are
at arm’s length.

The audit by Grant Thornton concluded that few of these parameters were followed in
the awarding of contracts to a company named GHV India Private Limited. The
contracts worth Rs 2,827 crore GHV won constitute 11.66 percent of the total contracts
of Rs 24,258-crore awarded by ITNL, but the Grant Thorton audit found that GHV has
been facing a liquidity crunch since 2014 and the company was patronised by ITNL with
contracts despite its weak financial conditions.

The audit findings by consultancy Grant Thornton (GT) reveal that the management
knew about the financial challenges that the group was facing since 2016 and it had

Electronic copy available at: https://ssrn.com/abstract=3624001

also discussed with the Reserve Bank of India (RBI) to make necessary regulatory
amendments to facilitate fundraising at the holding company level.

LIMITATIONS OF FORENSIC ACCOUNTING

Forensic accounting works when the fraud has occurred. Certainly, it digs into the hole
and finds out what happened, when happened and how happened.

Forensic accounting can also be used as a preventive vigilance measure by the big
corporates, by hiring the company secretaries, chartered accountants with forensic
knowledge of expertise in its daily routine accounting operations, as they are well in
knowledge of the vulnerable areas.

But, forensic accounting or expert cannot check the unethical and immoral attitude of
the dealing persons and it becomes even more difficult when the management of the
organization is involved in such activities. In such cases, doom appears imminent and
one comes to know only after loss has occurred. It can happen only when the regulator
appoints the CEOs with clean background and has a regular check on the red flags
being raised from time to time.

Analysis of finding

If we see the findings of forensic in IL&FS, we feel that these findings are also pointing
towards gap in control by the regulator. Further, it appears that the company was
throughout trying to hide the financial challenges it was facing.

Similarly in Neerav modi case, the findings also resulted in pointing to gap in the CBS
system of accounting in banks with the SWIFT network. This gap was finally bridged by
the bank after such a big loss of money and reputational loss to bank.

Conclusion

The growing NPA and the nature of fraud activities in the NPA accounts as well as
regular issues of corporate governance, There is immense future specialists in forensic
accounting as a distinct area and consulting.

In view of the rising levels of financial irregularities, the requirement for forensic
accountants is regularly on the rise to significantly step up in the coming times. Also, a
dearth of qualified and experienced forensic accounting skill sets in India makes it a
prized and valuable career for CAs to pursue. Forensic accounting helps the
government, regulators and all stakeholders of the companies to have a confidence in
dealing with such corporate.

Electronic copy available at: https://ssrn.com/abstract=3624001

References

1. Moneycontrol.com, Jun 02, 2020 08:23 AM IST | Source

2. Assocham, June 2015, “Current fraud trends in financial sector”.

3. Deloitte, April 2015, “Indian banking fraud survey, II”.

4. Business today, November,2019, “Corporate frauds trebled in seven months of

FY20, SBI”.

5. India today, 30Aug, 2019,” RBI report: Economic situation grim ,banking fraud

amount rises by 70 %”.

6. Dinesh Kumar Gupta, SSRN, “issues in corporate governance in India”.

Electronic copy available at: https://ssrn.com/abstract=3624001

AUTHOR

DR. DINESH KUMAR GUPTA, Ph.D

Guru Jambheshwar University of Science and Technology - Department of Business
Management
Hisar, haryana 125001
India

Electronic copy available at: https://ssrn.com/abstract=3624001