Forensic audits gain pivotal role in insolvency landscape
New Delhi, Sep 3, 2023
Summary
The rise in bankruptcy actions in India is driving the growth of forensic audits, which provide evidence for court proceedings.
Rising instances of bankruptcy actions by creditors under India’s Insolvency and Bankruptcy Code (IBC) against distressed companies are fuelling the growth of forensic audits, and signifies the increasing importance of such audits in providing evidence for court proceedings, said experts.
Forensic auditors scrutinize financial records to unearth evidence, including irregularities, which are relevant in legal cases. IBC’s focus on reviewing past transactions of companies highlights the critical role of forensic auditors in addressing industrial distress in India, the experts added.
Anoop Rawat, a partner specializing in IBC at the law firm Shardul Amarchand Mangaldas & Co., explained the provisions for dealing with preferential, undervalued, or fraudulent transactions of corporate debtors leading up to insolvency proceeding, or ‘avoidance transactions.’
“Under these provisions, resolution professionals can hire services of professionals (forensic auditors) for a determination on these transactions, and upon determination by a resolution professional, he is required to approach tribunals for seeking reversal of avoidance transaction among other remedies."
Besides, lenders, under the Reserve Bank of India norms, often get forensic audits done to decide whether the corporate debtor is involved in any fraud, said Rawat.
According to experts, in the case of related-party transactions, the resolution professional’s examination of pre-bankruptcy dealings extends up to two years from the date of bankruptcy admission in a tribunal. For other transactions, this period is up to one year. The growing focus on scrutinizing historical transactions of bankrupt companies to optimize available assets for restructuring is bolstering the forensic audit industry, the experts added.
Srinivasa Rao, leader and partner, risk advisory services, Nangia & Co LLP said many global and Indian laws and regulations are contributing to the growth of the sector. “For example, after the IBC came into effect, forensic audits grew many fold as it helps in investigating and documenting if any financial irregularity or fraud have led to the financial distress of the company," he added
Data from the Insolvency and Bankruptcy Board of India (IBBI) reveals that nearly 950 applications filed with the tribunals, challenging past transactions of distressed companies, account for ₹2.95 trillion.
“Forensic services is growing. The market is estimated at ₹1200--1300 crore," said Rao.
The Indian forensic audit market is primarily controlled by the top eight audit firms. An industry insider, seeking anonymity, said many times, the size of forensic audit projects is relatively small, which allows smaller audit firms to establish their presence in this sector.
Occasionally, high-profile investors request the involvement of larger audit firms for forensic audit. Indian Banks Association (IBA) maintains two lists: one comprising 166 forensic auditors for the loan accounts exceeding ₹50 crore, and another with over 200 firms for smaller borrowers.
Apart from audits conducted for legal proceedings under the IBC, corporations engage forensic auditors for internal business reviews without explicitly categorizing them as forensic audits, the experts said. Nevertheless, the focus remains on uncovering financial irregularities, enabling businesses to take prompt corrective measures, they added.
The Institute of Chartered Accountants of India (ICAI) has introduced forensic investigation standards, which are binding on chartered accountants practicing in India.
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