Forensic audits support corporate-fraud probes and IBC cases but still lack enforceable standards

Given the nature of the work, forensic audits are conducted globally by teams of professionals from diverse backgrounds, including accounting, auditing, law and information technology.

The absence of those skills may adversely affect the ability to gather and evaluate evidence, apart from the analysis and overall quality of work, ultimately affecting the reliability and efficacy of forensic audit reports.

Casual narratives often blur the distinctions between forensic, financial and internal audits. These are not the same, just as civil, criminal and commercial laws are not. Forensic accounting and auditing differ from financial audits and internal audits in scope, purpose and end use.

The Companies Act obligates companies to appoint a qualified chartered accountant (CA) as an independent auditor to conduct financial audits. The CA is required to express an opinion on whether the financial statements present a true and fair view of the company’s affairs. The aim is to provide independent assurance to stakeholders—shareholders, regulators, investors, etc—of the management’s financial statements. Financial audits are thus also called statutory audits.

Financial statements must be prepared in accordance with Accounting Standards and audited in line with Standards on Auditing; both are based on international standards and are legally enforceable as they have been notified as ‘rules’ under the Companies Act. Non-compliance renders company managers and auditors subject to regulatory scrutiny. The Act also requires companies to appoint internal auditors.

However, unlike financial auditors, who must only be CAs, internal auditors may be CAs, cost accountants or any other professional appointed by the board.

Banks have been appointing forensic auditors for stressed accounts under an RBI circular of 2016, which was superseded by similar directions issued in 2024 under the RBI Act and Banking Regulation Act. These require banks to conduct external or internal audits by auditors qualified under relevant statutes to probe red-flagged loan accounts further.

Since the Companies Act lets internal auditors be from other professions, it follows that CAs, cost accountants and members of other professional bodies can also be appointed as forensic auditors.

Resolution professionals commission forensic audits using their general powers under the IBC to appoint accountants, lawyers or other professionals to assist their work.

The Institute of Chartered Accountants of India (ICAI) has issued Forensic Accounting and Investigation Standards (FAIS) that professionals must follow. These define ‘professional’ as a qualified accountant who is a member of a professional body, such as the ICAI, and undertakes forensic accounting and investigation assignments using accounting, auditing and investigative skills. Clearly, professionals who are members of other bodies can also participate in forensic auditing.

However, unlike accounting and auditing standards, FAIS are not notified as ‘rules’ by the government and hence not legally binding on professionals from diverse fields conducting forensic auditing. At most, FAIS are binding on ICAI members. Thus, unlike financial and internal auditing, forensic auditing is not subject to any legally binding standards.

Firms offering forensic accounting or auditing services are typically consultancy firms, which do not require registration or regulatory oversight. In many cases, their reports do not reveal the names of team members, their professional qualifications or affiliations, or the standards and code of ethics followed. Their reports often include numerous caveats that seem designed to avoid accountability.

The oft-quoted argument that such firms are internationally renowned lacks merit; major global audit firms also get penalized for violating standards.

Bank frauds and insolvency cases resulting from corporate fraud have been widely reported. The absence of legally binding standards is a public policy concern, given the widespread use of forensic auditing to probe fraud and strengthen the enforceability of legal action. India needs to bridge this regulatory gap in public interest.

India must harmonize frameworks under the Companies Act, RBI circulars and FAIS issued by the ICAI for clarity on who can be appointed forensic auditors, how their work is to be regulated and by whom.

Increasing cases of corporate fraud that call for forensic audits as part of investigations make it essential to establish a uniform, legally enforceable regulatory framework for firms and individuals conducting these audits, along with a framework of accountability and oversight by an appropriate regulator.

The author are, respectively, former chairman, Sebi and LIC; and former deputy comptroller and auditor general and member, National Financial Reporting Authority.