In a sweeping regulatory move, India’s National Financial Reporting Authority (NFRA) has sent notices to current and former auditors of IndusInd Bank amid concerns over possible accounting fraud linked to the bank’s foreign exchange derivatives. The move signals growing scrutiny over how auditors handle red flags in complex financial institutions.
NFRA Probes Audit Failures Amid Derivatives Accounting Concerns
Less than two weeks ago, NFRA issued formal notices to MSKA & Associates—part of BDO Global—and other auditing firms that worked on IndusInd’s books from 2017 onward. The notices seek complete audit files for each year, including working papers and documentation of audit scope, especially around derivative-linked accounts.
Sources close to the matter said NFRA is trying to determine whether auditors failed to detect or reported misleading accounting related to forex derivatives—an area that allowed the bank to either inflate profits or conceal losses depending on currency movements.
Accounting ‘Discrepancy’ or ‘Fraud’? Auditors Under Pressure
The controversy erupted after internal auditors raised concerns earlier this year about inconsistencies in IndusInd’s financials. The bank initially referred to these issues as “discrepancies” rather than “fraud.” However, regulators stress that misstatements involving intent must be classified as fraud and reported to the Ministry of Corporate Affairs and law enforcement.
This puts pressure not only on auditors to clarify their role in these lapses but also on the bank’s management to justify internal oversight. The audit files are expected to contain Memoranda of Changes (MoCs) and other material documents that show how financial risks were recorded—or ignored.
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A number of major firms, including PwC, S.R. Batliboi (EY), Haribhakti & Co, and M.P. Chitale & Co, have audited IndusInd during the review period. All of them may be required to defend their audit methodologies. In 2024, auditors even removed “valuation of derivatives” from the list of key audit matters in the annual report—raising questions about intent and diligence.
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NFRA’s focus on auditors alone, however, has drawn criticism. Experts argue that the audit committee and IndusInd’s senior management should also be held accountable, especially those who directed or approved internal hedging trades that formed the core of the controversy.
Will NFRA’s Findings Lead to Criminal Action?
Most auditors are yet to fully cooperate, citing legal constraints like the Banking Regulation Act. Still, NFRA, being a statutory body under the Companies Act, is expected to coordinate with RBI and the Ministry of Corporate Affairs for broader access.
If NFRA’s findings confirm negligence or complicity, this could escalate to criminal investigations. Given the potential classification of these acts as fraud, regulatory disclosures could eventually involve the Economic Offences Wing and even lead to disqualification of some audit firms. The NFRA’s move could set a precedent in how audit failures are handled in India’s banking sector. At the heart of the issue lies a fundamental question: did the auditors miss the red flags—or were they looking the other way?