IndusInd Bank faces tough questions from auditors over possible fraud: Report

India Today

12-05-2025

IndusInd Bank is facing serious questions from its auditors about a possible case of financial wrongdoing linked to its accounting of foreign currency derivative trades.Auditors are asking the bank to clearly say whether the issue is an error, a technical mismatch, or an actual fraud, reported The Economic Times.So far, IndusInd Bank has described the issue as a 'discrepancy'. This is the term it has used in its stock exchange notices and in talks with analysts and credit rating firms.advertisement
However, with the accounting problems now under review by auditors, the bank's management will need to be more clear and specific in its explanation.AUDITORS SEEK CLEAR ANSWERSAs per the report, the issue has reached a point where the bank's board of directors, led by chairman Sunil Mehta, and the audit committee, headed by Bhavna Doshi, must decide how to define the problem.Under Indian law, if auditors believe that a fraud involving more than Rs 1 crore has taken place, they are required to report it to the government. If it is under Rs 1 crore, they must inform the bank's board or audit committee.In this case, the accounting issue may result in losses of nearly Rs 2,000 crore. If the bank officially calls it fraud, the auditors will have to report it to the Ministry of Corporate Affairs. The bank is expected to make its position clear soon, as its annual financial statements are due, and they will reflect the full impact of the losses related to foreign exchange derivatives and its microfinance business.WHAT CAUSED THE ISSUE?advertisementAccording to the report, the problem began from different accounting methods used for two connected transactions. On one side, the bank raised deposits in dollars and yen through internal deals between departments. On the other side, its treasury carried out forex derivative trades in the inter-bank market with other banks.One part of these transactions used accrual accounting, where profits or losses are recorded as they happen over time. The other part used mark-to-market accounting, where trades are valued at current market rates.This mismatch allowed the bank to delay recording some losses, while gains were reported immediately. Over time, this led to profits being overstated in earlier years. Now, these past mistakes are being corrected, resulting in a reported Rs 2,000 crore loss.The main question now is whether this is simply a mistake, or if it was done on purpose. A senior banker told The Economic Times that the bank may have avoided using the word 'fraud' either because internal procedures are still going on or to avoid raising alarms.The Reserve Bank of India (RBI) defines fraud as including many types of financial wrongdoing, such as breach of trust, fake forex transactions, and even altering financial records. These are covered under Indian laws, such as Section 477A of the Indian Penal Code, which deals with falsifying accounts.advertisementSources told The Economic Times that IndusInd Bank may be waiting to go through responses from employees named in the forensic audit done by Grant Thornton. These responses could help the bank decide if the incident should be called fraud. Whatever the decision, it will be reflected in the annual report and the auditors' statement for the 2024–25 financial year.This issue has drawn attention from rating agencies as well. Last week, Moody's downgraded IndusInd Bank's standalone financial rating. The agency pointed to weak internal controls and lack of proper oversight by the bank's management as reasons for the downgrade.The situation is also being closely watched by the banking sector. If IndusInd does report this as a fraud, it will have to file a 'fraud monitoring return' with the RBI, which could set an example for how such cases are handled in future.As of now, both of IndusInd's auditors, MSKA & Associates (a part of BDO) and Chokshi & Chokshi, have not made any public statements.Must Watch