Was it a 'fraud'? Auditors ask IndusInd Bank
May 11, 2025
Synopsis
IndusInd Bank faces scrutiny as auditors demand clarity on its derivative accounting discrepancy, potentially classifying it as fraud. The issue, involving losses near ₹2,000 crore, stems from differing accounting treatments in internal and external forex transactions. The bank's board must decide on the 'fraud' designation, impacting regulatory reporting and potentially setting an industry precedent.
'Error', or 'discrepancy', or 'fraud'? IndusInd Bank has come to a point where its management will have to unambiguously spell out the nature of its questionable derivative accounting.
The statutory auditors of the private sector bank are believed to have asked the institution to state whether the discrepancy in the bank's derivative accounting which caused large losses, was a case of 'fraud', said banking sources.
Compared to other listed entities, describing a mismatch or irregularity as 'fraud' may have regulatory implications for a bank.
Till now, the IndusInd management has described the issues arising from its foreign currency derivative accounting as 'discrepancy'. It has been the bank's choice of word in notices to stock exchanges as well as in interactions with analysts and credit rating agencies.
However, with the auditors having raised the issue-as auditors are required under the law-the bank's board of directors (under chairman Sunil Mehta, a veteran banker) and the audit committee (headed by Ms. Bhavna Doshi, a senior practitioner who has been an independent director in multiple boards) would have to take a stand.
Sub-section 12 of Section 143 of the Companies Act, 2013 casts a duty on statutory auditors to report frauds committed by employees of the company in question. If the amount involved is more than ₹1 crore, an auditor is required to report the matter to the government, while if the matter is less than ₹1 crore, the auditor must inform the company's board or audit committee.
IndusInd's accounting 'discrepancy' would result in losses of close to ₹2,000 crore.
If the IndusInd management confirms it as 'fraud', the auditors would formally report it to the ministry of corporate affairs. The bank may express its views shortly as the annual accounts which would capture the full impact of losses linked to forex derivative and micro-finance business would have to be finalised soon.
"Whether you call it creative accounting, discrepancy, some kind of malpractice or irregularity, at the end of the day one would expect the transactions to be categorised under some regulatory definition. The bank probably refrained from saying fraud either because formalities are not over or to downplay the issue," said a senior banker tracking the case.
While a discrepancy or error may be attributed to technical or clerical reasons, a fraud indicates an intent to deceive.
IndusInd auditors-MSKA & Associates, an arm of BDO, and Chokshi & Chokshi-did not comment on the matter while a bank spokesperson did not respond when asked whether the bank board would report the accounting discrepancy as 'fraud'.
Borrowing from the erstwhile Indian penal code, the Reserve Bank of India's definition of fraud covers different forms of financial deception, including breach of trust and irregular foreign exchange transactions. And, altering books and electronic records are included in the list of offences under Section 477A of the penal code dealing with falsification of accounts.
The bank's accounting mismatch is understood to have stemmed from differing accounting treatments to internal deals (between the desk that raises dollar and Yen deposits and the treasury), and the external forex derivative transaction in the inter-bank market between IndusInd treasury and another bank. With one leg following accrual accounting and the other leg doing a mark-to-market accounting, valuation losses were deferred while gains were recorded. The roll back of past years' overstated profits (due to postponement of losses) resulted in the ₹2,000 cr loss number.
The bank may weigh the responses of employees named in the forensic report (by Grant Thornton) to decide on the 'fraud' tag, said sources. "This would determine what is finally stated in the annual report and the auditor's report for 2024-25. It could also set a precedent for the industry as banks report cases of frauds by filing 'fraud monitoring return' (FMR) with RBI," said another banker.
Last week, rating agency Moody's downgraded the bank's standalone financial profile due to weaknesses in internal controls and inadequate management oversight.
[The Economic Times]
