Forensic Audits: New Way to Check Frauds

The Indian government has resorted to forensic audits because statutory audits have failed to uncover or prevent frauds.

Forensic Audits: New Way to Check Frauds

The Public Sector Banks (PSBs) in India, as of late, been riddled with scams and bad loans. This has become a major problem since the ones committing the offense have been able to fly away. And one of these individuals includes the diamond merchant, Nirav Modi who got away with $1.8 billion, described as India’s biggest bank scam ever.

As the limelight fell on the banks, investigations have shown deeper and wider problems. The PNB (Punjab National Bank) scam has been attributed to undetected fraudulent activities which led to the increasing mismanagement of funds. Research shows that increasing fraud in the banking sector is attributed to the unwillingness of banks to effectively address fraud, inadequate laws, making courts fail to convict the involved individuals and the lack of independence of the auditing role.

Earlier this year, the Finance Ministry called for forensic audits in PSBs. Reports showed that the RBI was focusing on trade financing activities, especially the issuance of letters of undertaking (LoUs). The government had also directed the in-depth review of non-performing assets (NPAs) exceeding Rs50 crore.

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Dr. Rajkumar Adukia, an eminent business consultant, academician, and writer describes forensic loan audit as a thorough scientific investigation of a loan to determine whether a lender has violated any federal or state laws. “If forensic loan audit is done by the banks, any fraudulent documents submitted or promises made before loan dispersal can easily be identified. This will help in avoiding problems in recovery at a later stage.”

Adukia said banks should do pa roper background check before sanctioning the loans. “There should be a collection of proper documents and their verification to check its legal enforceability, plus a strict recovery policy.” In terms of policies, Adukia said lending policies should be stringent. “So that appropriate charge is created in the bank’s favor to recover the outstanding loan. Forensic loan audits should be made compulsory and proper steps should be implemented to monitor loan accounts.”

The government and the RBI can avoid or prevent such incidents in the future by the privatization of PSBs. “Creation of proper dynamic markets for stressed assets should be helpful alongside proper RBI governance and supervision. Moreover, the banks should closely monitor the loan accounts from the date of the first default made and identify the patterns.”

It is up to the management of the respective banks to develop strong internal controls that will help in the detection of frauds. Furthermore, it has been observed that the growth of PSBs, the number of shareholders and separate ownership from the management has been on the increase which is a contributing factor to the rising fraud, and needs to be checked urgently.