A STUDY ON FORENSIC ACCOUNTIONG AND LEGAL INVESTIGATION IN FRAUD CASES IN INDIA BY - AKSHAYA.R & DEVADHARSHINI V.V

A STUDY ON FORENSIC ACCOUNTIONG AND LEGAL INVESTIGATION IN FRAUD CASES IN INDIA
 
AUTHORED BY - AKSHAYA.R[1]
ASSISTANT PROFESSOR,
VISTAS
 
CO-AUTHOR - DEVADHARSHINI V.V[2]
Vth Year - BBA LLB,
VISTAS
 
 
INTRODUCTION:
Today's global economy's complex financial systems and rising fraud rates make forensic accounting and legal investigations important for financial integrity. The Satyam scam, PNB fraud, and Nirav Modi case in India have shown the importance of forensic accounting in detecting, investigating, and preventing financial malfeasance.

The specialist field of forensic accounting uses accounting, auditing, and investigative abilities to identify fraud, assist legal procedures, and protect organizational assets. It helps connect money anomalies to legal processes alongside legal inquiries. In India, the Companies Act, SEBI rules, and the Prevention of Money Laundering Act (PMLA) promote this multidisciplinary approach to financial fraud.

This paper examines how forensic accounting and legal investigation have changed in Indian financial fraud cases. It analyses forensic accountants' methods, tools, and obstacles, notable case studies, and the field's potential to improve India's financial governance. This conversation emphasizes accountability, openness, and creativity in fighting economic crimes in India by deepening the understanding of these methods.
 
 
 
Evolution of forensic accounting and legal intervention in
Indian legal systems:
Forensic accounting, which combines accounting, auditing, and investigation, is essential to fighting financial fraud. Its rise in India has been linked to the complexity of financial crimes, corporate governance, and the necessity for strong legal frameworks to enforce justice.

In the early 20th century, forensic accounting in India was informal and limited. Chartered accountants were occasionally called upon to help resolve financial discrepancies, but these efforts were largely ad hoc and lacked formal recognition. With the establishment of the Institute of Chartered Accountants of India (ICAI) in 1949, The Financial Scandals and Forensic Accounting in the 1990s saw fast growth and corporate fraud in India due to economic liberalization. The Harshad Mehta securities scam (1992) showed systemic vulnerabilities and the need for specialized financial investigations, launching structured forensic accounting as organizations and regulators identified financial irregularities.

Official Forensic Accounting Recognition. Due to high-profile frauds like the Ketan Parekh stock market scam (2001), forensic accounting was institutionalized in the early 2000s. The Satyam Computer Services scandal (2009) exposed the limitations of traditional audits and increased reliance on forensic accounting to uncover and analyse fraud. After 2009, ICAI began offering certifications in forensic accounting.
 
Forensic accounting's integration with the legal system has been spurred by modifications to legislation and regulations including the Companies Act, 2013, which mandated auditor fraud reporting and class action suits. The 2002 PMLA strengthened the necessity for forensic audits in money laundering cases. SEBI Regulations: Forensic investigations into insider trading and securities fraud increase listed company accountability. Judicial Collaboration: Indian courts and law enforcement organizations like the CBI, ED, and SFIO now use forensic accounting reports as evidence. Case Law Development: The Satyam case established forensic audits as a tool for conflict resolution and accountability.

Technology has improved forensic accounting and its significance in judicial systems. Forensic accountants can give accurate and fast evidence for judicial processes using data analytics, AI, and blockchain. SEBI and RBI are also using technology to improve monitoring and inquiry.
Recent developments and future outlook - Forensic accounting has become an important part of corporate governance in India, with companies conducting forensic audits to prevent fraud. Mandatory forensic audits for stressed assets under RBI rules have formalized its position in financial and legal systems. Financial fraud is predicted to become more sophisticated, boosting collaboration between forensic accountants and legal specialists to establish complete economic crime frameworks.
 
Indian forensic accounting regulations and statutes:
Forensic accounting needs a strong legal and regulatory framework in India due to rising financial frauds and organizational complexity. Forensic accountants are guided by many rules, regulations, and guidelines to ensure financial integrity and responsibility. The main regulatory and statutory provisions that shape forensic accounting in India are listed below.

Section 143(12) of the Companies Act, 2013 requires auditors to disclose suspected fraud to the board of directors or the Central Government, depending on its severity. Forensic Auditors: The Act stresses fraud detection during audits, making forensic accounting an essential aspect of the audit process. Forensic audit findings can help stakeholders file class action cases against unscrupulous corporations (Section 245).

The 2002 Prevention of Money Laundering Act (PMLA) is essential for money laundering investigations, requiring forensic accountants to evaluate financial transactions and identify suspect activity. Forensic accountants help the Enforcement Directorate (ED) track money trails, detect benami transactions, and unearth complex financial systems.

Forensic Audits of Listed Companies: SEBI requires forensic audits for companies involved in insider trading, financial misreporting, and other fraudulent practices. Forensic accountants help detect insider trading, stock manipulation, and financial statement fabrication.

Under its framework for bad debt resolution, the Reserve Bank of India (RBI) requires forensic audits for stressed assets and Non-Performing Assets (NPAs) in banks to identify wilful defaulters, fraudulent loans, and fund diversion. Banks can structure forensic investigations with circulars like the Master Direction on Frauds – Classification and Reporting.

The Companies Act created the severe Fraud Investigation Office (SFIO) to investigate severe financial irregularities in India. Forensic accountants assist the SFIO in financial data analysis, fraud detection, and prosecution preparation. The SFIO uses forensic audit results to determine fraud severity and culprits.
 
Income Tax Act, 1961—Forensic accounting helps reveal tax evasion, concealed income, and intricate tax frauds. Black money and unexplained wealth cases are tracked by forensic accountants at the Income Tax Department.

Forensic audits are sometimes used in bankruptcy proceedings to discover fraudulent transactions, advantageous transfers, and undervalued deals by insolvent corporations. Resolution specialists use forensic accounting to determine promoter fraud.

Under the Indian Evidence Act, 1872, forensic audit results can be used in court. Section 45 of the Act allows forensic accountants to testify in fraud proceedings as expert witnesses.

Under the Benami Transactions (Prohibition) Act, 1988, forensic accountants identify benami (proxy) transactions and reveal asset ownership. They let authorities track bank movements and uncover fraud.

Another key provision and agency is the Central Vigilance Commission (CVC), which often orders forensic audits in public sector corruption and financial irregularities cases. Lokpal and Lokayuktas Act, 2013: Forensic accountants investigate corruption cases. Information Technology (IT) Act, 2000: As cybercrimes proliferate, forensic accountants work with cybersecurity professionals to detect digital fraud and assure IT Act compliance.

In India, forensic accounting faces challenges in legal investigation.

In India, forensic accounting is vital for financial fraud detection and investigation. Forensic accountants confront many obstacles due to fraud scheme complexity, limited resources, and systemic inefficiencies.

Forensic accounting is still a new field in India, with enterprises, regulatory bodies, and stakeholders unaware of its breadth and importance. Forensic audits are seen as a cost rather than a financial fraud prevention measure by many companies.
The regulatory framework for forensic accounting is lacking, despite various legislation addressing financial wrongdoing. Forensic investigations lack standardization, resulting in inconsistent approaches and reports.

Limited Training and Expertise—Forensic accounting demands specific accounting, law, and technology expertise. However, India lacks competent forensic accountants. Many investigators lack data analytics, blockchain analysis, and digital forensics skills.

Technological Challenges - Rapid technological advances have enabled sophisticated fraud schemes that are hard to identify using forensic procedures. To access and analyze encrypted or hidden digital data, forensic accountants typically struggle. Cyber frauds, especially cryptocurrency scams, are harder to trace due to legislative uncertainty and technology.

Delayed Data and Information - In private organizations, forensic accountants often have trouble getting financial records, transaction data, or system access. Fraud investigations are complicated by employee, management, or external party resistance.

Organizational Resistance—To avoid reputational damage, regulatory attention, or legal penalties, organizations fight forensic examinations. Internal fraud whistleblowers and auditors may be intimidated or retaliated.

The Indian legal system is overcrowded, delaying forensic accounting report-based cases. Forensic accountants may struggle to simplify financial data for lawyers and courts. If the investigation violates protocols, forensic evidence may not be admissible in court.

Forensic audits, especially those using modern methods and technologies, are costly. Many SMEs cannot afford forensic accountants, therefore fraud goes unchecked.

Due to organizational inefficiencies and divergent agendas, forensic accountants typically struggle to collaborate with law enforcement authorities like the police, CBI, and SFIO. The lack of a clear structure for forensic accountant-government agency coordination slows fraud case resolution.

Financial frauds in India are becoming more complex, involving multi-layered transactions, offshore accounts, and shell businesses. Forensic accountants struggle to track funds between jurisdictions and find concealed assets.

Ethical and Professional Risks - Clients and management may pressure forensic accountants to ignore discrepancies or alter results. The potential of professional liability or legal action for incorrect judgments complicates matters.

Cultural and Regional Challenges – India's unique culture and language can make regional inquiries difficult. Local traditions and informal financial arrangements can hide fraud.

Insufficient Preventive Measures - Many Indian organizations only use forensic accounting after fraud has happened. Without strong internal controls and risk management, early fraud detection is difficult.
 
Implementation Issues
Many issues remain despite these regulatory and statutory provisions:
Insufficient stakeholder awareness about forensic accounting.
Poor forensic accountant training and resources.
Delays in court proceedings hinder fraud resolution.
 
Future trends in Indian forensic accounting and legal investigation:
Technological advances, legislative reforms, and financial fraud complexity are transforming Indian forensic accounting and legal inquiry. The primary trends likely to shape this domain are:

AI and ML will be utilized more to discover abnormalities, automate data analysis, and identify fraud tendencies. Machine learning systems can predict fraud using previous data. Blockchain Technology: Blockchain's transparency and immutability help forensic accountants follow financial transactions, ensure accountability, and reduce fraud. Data Analytics and Big Data: Forensic investigators can utilize modern data analytics to find hidden patterns in vast financial data and discover fraud in real time.

The rise of cybercrimes and digital fraud has increased the necessity for digital forensics. Digital evidence retrieval, analysis, and presentation tools will be crucial to investigations. Forensic accountants and cybersecurity experts must work together to investigate cryptocurrency, phishing, and digital fund embezzlement frauds.

Strengthening Regulatory Frameworks - The Indian government and SEBI, RBI, and ICAI are expected to tighten compliance and reporting criteria. Certain sectors may require forensic audits to improve corporate governance transparency and accountability.

Preventive Forensic Accounting—The shift from reactive to proactive will accelerate. Prevention forensic accounting procedures like fraud risk assessments, internal control reviews, and employee training will grow. Continuous financial transaction monitoring tools can help firms detect and prevent fraud before it causes major damage.

As financial crime grows more global, Indian forensic accountants will work with Interpol, FATF, and forensic professionals globally to examine cross-border fraud cases. International standards for forensic accounting and investigation will improve transnational fraud case cooperation and effectiveness.

As specialized skills become more important, forensic accountants with legal, technology, and accounting experience will be needed. Training and certification in forensic accounting, digital forensics, and fraud investigation will increase.

AI in Legal Processes - AI tools will help legal investigators analyse evidence, anticipate case outcomes, and streamline documentation and legal drafting. This will streamline fraud-related judicial actions.

The Whistle-blower Protection Act, 2014, and company whistle-blower policies will encourage more people to disclose fraud, increasing the demand for forensic accountants to verify such accusations.

Forensic accounting practices for banking, insurance, real estate, and technology will emerge. Sector-specific fraud threats will be addressed by specialized expertise.

Forensic accounting emphasizes ethics and corporate social responsibility, making corporations accountable legally and morally. Businesses will gain public trust with this change.
 
Conclusion:
Forensic accounting in India evolved from informal practises to a vital part of financial and legal institutions. Increasing regulatory scrutiny and technological advances will make forensic accounting even more important in guaranteeing openness, accountability, and justice in India's financial sector. Its inclusion into the legal framework has improved India's fraud prevention and rule of law.

India's regulatory and statutory structure has changed to accommodate forensic accounting's rising role in financial fraud control. These provisions ensure financial ecosystem openness, accountability, and strong governance. However, stronger enforcement, capacity building, and financial investigation technology are needed to maximize forensics' potential.

Tech issues and institutional inefficiencies plague Indian forensic accountants. To strengthen the forensic accounting ecosystem, regulators, organizations, and experts must work together. Enhanced training, technological adoption, regulatory reforms, and awareness can help forensic accountants fight financial fraud.

Technology, regulatory reforms, and ethics will shape Indian forensic accounting and legal investigations. Financial fraud detection, prevention, and resolution will require enhanced tools, proactive methods, and worldwide coordination as fraud schemes become more sophisticated.

[1] Akshaya R, Assistant Professor, VISTAS
[2] Devadharshini V.V, Vth year – BBA LLB, VISTAS