NBFC: forensic auditors seek compensation from banks and NBFCs against litigation

For a senior partner working in the forensic division of a large professional services firm, traveling to another city twice a month for business was a norm, until the purpose of some visits became a hearing before courts.

Her business was sued by the promoters of a failing business, over a forensic report she submitted to lenders which showed how money was diverted from the business.

“It’s a lost place and I wonder why I joined the profession,” said this person. He claims his firm spent more money on the lawyers than he charged the banks for the report.

Forensic auditors are now looking to protect themselves against such cases, as developers and corporate executives facing allegations of fraud are increasingly filing lawsuits against them over the findings of the reports.

“We started seeking compensation from banks when performing forensic audits for embezzlement or siphoning of funds, to cover the legal costs of defending against frivolous litigation by developers or managements to circumvent the forensic report. legal, because the fees for these forensic audits do not cover these costs,” said this partner.

Forensic auditors including Deloitte, KPMG, PwC and EY have begun seeking compensation from banks and other lenders for any litigation against them by disgruntled developers.

In a recent case, KPMG was sued by Srei Group promoters after its forensic report indicted them.

In recent months, some of these companies have been sued or the subject of police complaints as they investigate allegations of fraud against failed business promoters.

“Given the nature of our business, our reports tend to be sensitive and confidential and are produced specifically for the use of our clients, with a predefined scope of work; therefore, also naturally intended for use only by the intended customer. As an accepted industry practice, our engagements are protected by indemnification against third-party claims and any legal intervention or expert witness service (if required) is covered by a scope extension,” said Nikhil Bedi, Partner and Leader – Forensic, Financial Advisory, at Deloitte India.

Many associates of large professional services firms are covered by insurance against such litigation. However, the insurance they claim is often insufficient and unhelpful due to a lot of litigation lately, according to people in the know. Moreover, in many cases, junior managers who are not covered by any insurance are also drawn into the conflict.

In one case, the promoters of a business filed a police complaint against forensic investigators for alleged harassment. The complaint named the company and three-four of its executives.

“This tendency to sue forensic auditors can have a chilling effect and unless the courts come out strongly on this trend, auditors will seek compensation against such litigation. They express their professional point of view. This should not expose them to litigation,” said Suhail Nathani, managing partner at law firm Economic Law Practice.

According to industry trackers, many companies have stopped participating in the bidding process for bank-mandated forensic assignments due to legal risk.

“It doesn’t make sense, especially because in such a process the fees are capped and there is no way to seek compensation,” said a partner at a major audit firm.

Investigators say that for some associates and executives, much of the time is spent on litigation or complaints.

“Auditors have three options: build the cost of the dispute into the quote, purchase appropriate insurance and build the cost into the quote, or seek compensation from the client. Of course, if the audit firm is at fault, they themselves will be responsible,” Nathani said.


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