The government will shortly announce forensic standards based on Institute of Chartered Accountants recommendations, the Ministry of Corporate Affairs will notify on the lines of the Accounting Standards, the Forensic Standards and this will be applicable to all auditors who are doing forensic accounting at the behest of banks for complying to various RBI circulars on Non-Cooperative Borrowers, Willful Defaulters and Fraud Classification. Also, IBBI the bankruptcy board will also use such standards for the purpose of IBC related forensic audits.
There are hundreds of cases across various courts in India on this subject filed by borrowers, companies and individuals.
A December 10, 2020 Telangana High Court Division Bench order (in the case of SBI & others Vs. Mr. Rajrsh Agarwal & others) which held that the declaration of an account as ‘fraud’ as per the RBI’s circular on Fraud Classification by banks without following the principles of natural justice, is arbitrary and illegal, has been challenged by SBI and other banks before the Supreme Court. It is understood that the RBI is also in the process of filing an appeal against the said order of the Telangana High Court. The Supreme Court bench headed by Justice Nariman is to hear this matter on March 26, 2021.
The Supreme Court in 2019 in an order by Justice Nariman has required banks to follow the principles of natural justice while seeking to classify an account as a ‘willful defaulter’ as per the RBI issued circular on Willful Defaulters in 2015.
The Supreme Court’s order in SBI’s appeal on March 26, 2021 is expected to directly affect all these pending cases across India.
Banks generally declare an account as ‘willful defaulter’ or ‘fraud’ based on a report of a forensic auditor appointed by the banks. However, as of today, there are no prescribed forensic standards which mandate or guide how an auditor is required to approach any particular set of transactions before it.
In an effort to provide clarity in this respect, the Institute of Chartered Accountants of India is shortly seeking to introduce a set of forensic accounting standards which would need to be applied to evaluate and investigate the transactions in question.
While it is expected that such standards set out by the ICAI would provide guidance on the path forward, the validity of existing forensic reports which do not follow any set methodology or standard, is unclear. Consequently, the actions of the banks to rely on such forensic reports while declaring the account as ‘fraud’ would also need to be revisited.