India – New Companies Act may be behind increased demand for forensic audits

08 Apr 2014

The number of Indian companies wanting forensic audits on their financial statements is increasing – so quickly, says the Indian newspaper ‘Business Standard’, that large audit firms are adding hundreds of staff to their forensic teams to handle the demand.

Forensic audit has been front of mind for many in business in India. High-profile frauds, such as the NSEL scam, have been covered widely in national and international news – and their sprawling nature, affecting many organisations and corners of the market means that more forensic audits of other companies are likely.

Banks, too, are ordering forensic audits of companies that have asked them to help with corporate debt restructuring. These audits would verify whether the company is really in distress, or whether its funds have simply been moved around to present a picture of distress.

And true to the global trend, the role of the auditor is coming under more scrutiny too. Audit firms in India will now be regulated by the National Financial Reporting Authority. Those found to be failing in their duties by signing off on fraudulent or misleading financial statements will be subject to heavy penalties.

But there are other reasons why demand may be rising. Provisions of the new Companies Act mean that every company now has to have proactive fraud risk management policies. The Act requires independent directors to increase safeguards against fraud and reminds them of their whistleblowing responsibilities. Objections must be documented, and now that the Act defines fraud and safeguards explicitly, ignorance of the parameters of either will no longer be a defence.

“This is only one of the ways that the Companies Act is set to have far-reaching implications”, says PwC India partner, Harinderjit Singh. “The bar for corporate governance has been raised, and the penal consequences have been exponentially increased. We’re already seeing significant changes to the manner in which corporates operate in India.”

You can read more about the Companies Act here and assess the readiness of your company here.