India’s Forensic Audits Face Regulatory Void Amid Rising Corporate Frauds
IBC Cases Rely on PUFE Transaction Probes Without Binding Standards
Experts Call for Harmonized Oversight Under Companies Act, RBI, and ICAI
By Legal Reporter
New Delhi: May 22, 2026
Forensic audits have become central to investigating corporate fraud and insolvency cases under India’s Insolvency and Bankruptcy Code (IBC), but the absence of legally enforceable standards leaves a regulatory gap. While statutory audits under the Companies Act are tightly regulated, forensic audits remain largely unregulated consultancy exercises, raising concerns about accountability and reliability.
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The Rise of Forensic Audits
Forensic audits blend accounting, auditing, and investigative skills to examine financial information for use in legal proceedings. They are increasingly deployed in India to probe preferential, undervalued, fraudulent, and extortionate (PUFE) transactions during insolvency resolution under the IBC. Banks also rely on forensic audits to investigate stressed loan accounts flagged under RBI circulars.
Statutory vs. Forensic Audits
- Statutory Audits (Companies Act, 2013):
- Conducted by Chartered Accountants (CAs).
- Must comply with Accounting Standards and Standards on Auditing, both legally enforceable.
- Provide assurance that financial statements present a “true and fair view.”
- Forensic Audits:
- Conducted by consultancy firms or professionals from diverse backgrounds (CAs, cost accountants, lawyers, IT experts).
- Governed by Forensic Accounting and Investigation Standards (FAIS) issued by ICAI.
- FAIS are not legally binding, except on ICAI members.
- Reports often lack disclosure of team qualifications, standards followed, or accountability mechanisms.
Regulatory Gaps
- No Legal Recognition: Unlike statutory audits, forensic audits are not notified as “rules” under law.
- Oversight Deficiency: Consultancy firms offering forensic services are not registered or regulated.
- Quality Concerns: Reports often include caveats to avoid liability, undermining credibility.
- Public Policy Risk: With rising corporate frauds, reliance on unregulated forensic audits weakens enforcement of insolvency proceedings.
RBI’s Role
- RBI circulars (2016, updated in 2024) require banks to appoint forensic auditors for stressed accounts.
- However, qualifications are loosely defined, allowing non-CAs to conduct forensic audits.
- This creates inconsistency compared to statutory audits, where only CAs are permitted.
ICAI’s FAIS Framework
- FAIS provides guidance on professional conduct, investigative methods, and reporting.
- But without government notification, FAIS lacks enforceability across professions.
- This leaves forensic audits in a grey zone, unlike statutory audits which are backed by law.
Implications for Insolvency Cases
Resolution professionals under IBC rely heavily on forensic audits to detect PUFE transactions. Yet, without binding standards, the evidentiary value of these reports can be challenged in tribunals and courts. This undermines the effectiveness of insolvency resolution and creditor protection.
Way Forward
Experts recommend:
- Harmonization of Frameworks: Align Companies Act, RBI circulars, and ICAI’s FAIS.
- Legal Notification: Make forensic auditing standards legally binding.
- Regulatory Oversight: Establish a regulator to monitor forensic audit firms, similar to NFRA’s oversight of statutory auditors.
- Transparency Mandates: Require disclosure of team qualifications, standards applied, and ethical codes followed.
FAQs for Quick Understanding
Q1: What is a forensic audit?
A forensic audit is an investigative examination of financial records using accounting, auditing, and legal skills, primarily to detect fraud or irregularities for legal proceedings.
Q2: How is it different from a statutory audit?
Statutory audits are legally mandated under the Companies Act and conducted only by Chartered Accountants, while forensic audits are investigative, unregulated, and often conducted by consultancy firms.
Q3: Are forensic audits legally binding in India?
No. Unlike statutory audits, forensic audits lack enforceable standards. ICAI’s FAIS provides guidance but is not legally binding.
Q4: Why are forensic audits important in IBC cases?
They help resolution professionals identify PUFE transactions, which are critical to protecting creditors and ensuring fair insolvency resolution.
Q5: What reforms are needed?
India must establish a legally enforceable framework for forensic audits, harmonize existing laws, and introduce regulatory oversight to ensure accountability and reliability.
✅ In summary: Forensic audits are vital in tackling corporate fraud and insolvency cases, but India’s lack of enforceable standards leaves them vulnerable to credibility challenges. Harmonizing frameworks under the Companies Act, RBI, and ICAI is essential to strengthen accountability and protect public interest.