Lenders fail to spot fraud through forensic audits
, TNN|
Updated: Feb 23, 2018, 11.34 AM IST
MUMBAI: Banks are achieving little success in establishing fraud through forensic audit as auditors fail to come up with irrefutable evidence that holds in courts. Defaulting borrowers are successfully covering their tracks stymieing bank attempts to declare borrowers as wilful defaulters and make it difficult to rectify gaps in their processes.
According to a bank chief, lenders have failed to establish fund diversion in two of the largest bank defaults despite strong indications. “Many of these people are very good at cooking their books of record. The unsuccessful forensic audit is also being used by the defaulters to fight the wilful-default badge,” said the bank chief.
According to fraud experts, the reason for this is that banks go for forensic audit after the fraud has been committed and the fraudsters have covered their tracks. “Nobody records a bribe of diversion of funds. Which is why we have been telling banks: It is not forensic audit you need to strengthen. What needs to be strengthened is due diligence and checking of suspicious transactions,” said Reshmi Khurana, head of South Asia for risk consultancy, Kroll. The red flags that banks need to look for are delayed payments, increase in leverage and irregular transactions.
According to Khurana, courts set the bar for establishing frauds rather high and banks ask their auditors to come up with irrefutable evidence, which is a challenge given that investigations take place much after the event.
“The second reason why banks are increasingly wary of forensic audit is that if fraud is established, then they are accountable for how the fraud took place under their watch. So claiming that a fraud took place leads to a lot of questions that banks may need to answer which is why forensic audit is a bit of too little, too late,” she added.
According to a restructuring consultant, one of the reasons why banks do not get positive outcome in forensic audits is that their judgement gets clouded by getting blamed for something. “If the objective is to identify whether a lapse has occurred and on measures needed to fix it, there are firms that do high quality work. But if the objective is to only check the box at optimum prices, then you will get a totally different result,” he said.
He adds that this is because the system in state-owned lenders is such that it encourages bankers to kick the can further down the road.
According to a bank chief, lenders have failed to establish fund diversion in two of the largest bank defaults despite strong indications. “Many of these people are very good at cooking their books of record. The unsuccessful forensic audit is also being used by the defaulters to fight the wilful-default badge,” said the bank chief.
According to fraud experts, the reason for this is that banks go for forensic audit after the fraud has been committed and the fraudsters have covered their tracks. “Nobody records a bribe of diversion of funds. Which is why we have been telling banks: It is not forensic audit you need to strengthen. What needs to be strengthened is due diligence and checking of suspicious transactions,” said Reshmi Khurana, head of South Asia for risk consultancy, Kroll. The red flags that banks need to look for are delayed payments, increase in leverage and irregular transactions.
According to Khurana, courts set the bar for establishing frauds rather high and banks ask their auditors to come up with irrefutable evidence, which is a challenge given that investigations take place much after the event.
“The second reason why banks are increasingly wary of forensic audit is that if fraud is established, then they are accountable for how the fraud took place under their watch. So claiming that a fraud took place leads to a lot of questions that banks may need to answer which is why forensic audit is a bit of too little, too late,” she added.
According to a restructuring consultant, one of the reasons why banks do not get positive outcome in forensic audits is that their judgement gets clouded by getting blamed for something. “If the objective is to identify whether a lapse has occurred and on measures needed to fix it, there are firms that do high quality work. But if the objective is to only check the box at optimum prices, then you will get a totally different result,” he said.
He adds that this is because the system in state-owned lenders is such that it encourages bankers to kick the can further down the road.
(This article was originally published in The Times of India)
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