Preface

By definition, ‘Forensic Audit’ means “an examination and evaluation of a firm's or individual's financial information for use as evidence in court. A forensic audit can be conducted in order to prosecute a party for fraud, embezzlement or other financial claims”.  Thus, in the context of a bank, all financial transactions and decisions involving finance are analysed with a view to arrive at the truth.  Forensic Report can be admitted in a court trial and forensic auditors may directly submit evidence in the court or depose before a judicial authority.

 But, a forensic audit does not stop with mere audit of accounts. It goes a step further and find out the basis on which each decision was taken.  Since decisions could be of myriad types that could directly impact the financial affairs of an institution, it is imperative that we shall probe all types of such decisions taken in the bank concerned. 

 One must start with the questions – (a) Whether the person who had taken the decision in question enjoyed expressly delegated authority?  (b) Whether the decision was taken at the right moment (neither in haste nor after a delay)?  (c) Whether the decision was promptly reported to the next higher authority? (d)  Whether any mistakes of the past were repeated?  (e)  If the result of the decision made was just the opposite to what was intended, what were the remedial steps initiated?

 Now, let us discuss about the decisions taken and activities performed in each area/domain.

1. Credit Decisions

Credit is the area where forensic auditors concentrate first and start their probe.  Credit decisions must be compared with RBI policies and guidelines, individual bank’s credit policy and finally the general laws of the land.  If any deviation or violation is found in such a context, it is taken up for deeper investigation and reporting.

2. Investment Decisions

Investment decisions taken are compared with the objectives of investments made and actual returns are compared with anticipated returns. Other aspects like loss incurred if any and its magnitude and whether such loss could have been prevented are also analysed.  In case of lower profit, causes for the fall in profit are gone into.  It may be remembered that many investments escape the attention and scrutiny of concurrent auditors and statutory auditors as of now, due to paucity of time.

3. Income and Expenditure

Transactions involving both income and expenditure are taken up for investigation.  Income/Revenue foregone/lost and Expenditure that exceeded the normal levels are specifically probed.  The possible connection between a series of transactions is also analysed.  If the loss was deliberate, the forensic audit will probe the background of the true beneficiary in all such cases.

4. Violation of Regulator’s guidelines and prescriptions

Instances of deviation from/violation of the regulatory authority’s rules and guidelines are probed.  The fall out of these on the bank’s image and reputation, discipline, financial risks and loss if any are examined.  Obviously, the penalties levied by the regulator (RBI) for such deviation/laxity/violation are also covered in the report.

5. Unlawful activities

This is similar to Point No.4.  In this case, any activities carried out by the bank in contravention of the laws of the land are analysed from various perspectives and all their dimensions are brought out.  Ramifications of such activities, particularly the loss to the bank customers and general public and the possible threats to the nation’s economy will be dealt with.

6. Wrong Persons Vs. Wrong Decisions

This is an important aspect to be looked into unfailingly.  Mistakes made in placement will reverberate in all other areas.  No average human being is infallible.  But a person with a bad character and a history  bad behaviour in the past can vitiate the whole atmosphere.  So, a forensic auditor will look into this aspect too.

7. Illegalities in Recruitment, Promotion and Transfers

Any illegalities or irregularities noticed in recruitment, promotion and transfers must be subjected to further probe for necessary corrective measures.  I do not want to go into the various types of irregularities here, as this subject directly concerns the H.R. Department of the bank.  Most of the senior bankers from different banks will have several real stories to be shared in this connection.  But nobody can dispute the fact that selection, recruitment/promotion and placement of wrong persons at critical positions will cause immeasurable harm.  So, forensic audit must necessarily cover this subject.

 8. Organisational Structure

Banks in India have different organisational structures.  Even among the same group of banks, say public sector banks, this difference is quite conspicuous.   It is the prerogative of each bank to decide its structure.  But, while determining the organizational structure of a bank, proper attention must be paid to the geographical area of operation, organizational culture, period of transition if any etc.  Merely copying another bank in this regard will be suicidal.  Unscrupulous branch expansion is one area that is a grave mistake committed by all banks in the recent past.  Without recruiting adequate manpower and imparting necessary training to them and without investing adequate money in fixed assets and modern technology, indiscriminate branch expansion may result in huge loss.

 9. Systems and Procedures

Forensic Audit also looks into the systems and procedures followed by each bank and compares them with the industry.  Any deficiencies in the systems and lacunae in the procedures will weaken the bank.  This is one sensitive area which if neglected will result in delays, growing customer complaints, monetary loss, frauds and uncertainty in many areas.  So, forensic audit is to cover this topic also.

 10. Strategy

Strategies adopted by the bank may not be as effective as was planned.  So, changing of strategies may be prescribed by the forensic auditors. Dropping some product lines, pricing of products, adding new products in tune with the changing times and customers’ preferences, packaging of each product with additional features etc. may be thought of and recommended.  However, forensic auditor must act with extreme care and responsibility here, as otherwise he may compete with the bank’s consultants.

 11.Corporate Governance

Infusing more professionalism in the administration may be called for. Codification of corporate ethics, Transparency, Accountability and Truthfulness in the functioning of the bank and honesty in business transactions and simplified reporting of results in critical areas will achieve wonders.  Therefore, the forensic audit will attempt to remove the veil of secrecy in all unwanted areas and shall suggest suitable ways to adhere to the corporate ethics chosen by the bank voluntarily.

 12. Respecting the wishes of all stakeholders

The bank must do a balancing act to maximise the shareholders’ wealth by improving profitability, take several staff welfare measures to keep the employees happy and motivated and comply with all statutory requirements promptly and adequately as per the directions of the regulator.  In this area, the forensic auditor can make very valuable suggestions.

 13. Relativity with others in the industry

While competition is inevitable in today’s world, the bank must have some understanding and better co-operation with all other players to protect their common interests.  For this purpose, a professional body or association at all places and levels is needed.  This is different from Indian Banks’ Association whose role and responsibilities are entirely different. Here, sharing of vital information among all the banks in various ways is essential.  If a bank fails to either share its data/information with others or fails to utilise the information available with others, it may jeopardise its health. Forensic Audit must address this issue too.

 14. Social Responsibility

A good commercial organisation doesn’t cater to the needs of select segments of the society alone.  As a mark of gratitude to the society, it sets aside a part of the profits it earned for social and philanthropic activities.  To survive and grow further, a bank must learn to imbibe this in its organisational culture. Though this subject lies outside the jurisdiction of forensic audit, there is nothing wrong if some constructive suggestions are offered by the forensic audit team members.

Conclusion

As far as I am concerned, a forensic audit shall not stop with examining only the financial transactions of a bank.  As the quality of decisions made and their end result are the direct outcome of different departments within the bank, forensic audit cannot overlook other functions of the bank.  Then only a total and comprehensive picture can be obtained.  To be effective and successful, forensic audit must study various inter-related activities of the bank carefully and submit its report within a reasonable time.