Accounting Frauds in Recent Times in India: Case Studies, Root Causes and Corrective Actions by Professional Bodies, Government and Organisations
Introduction
The last decade in India has witnessed several high-profile corporate and banking frauds which exposed systemic weaknesses in corporate governance, financial reporting, audit quality and regulatory oversight. These episodes — encompassing public sector banks, cooperative banks, non-banking finance companies (NBFCs) and large corporates — have provided hard lessons for practitioners, regulators and the accounting profession. This article examines the accounting and reporting dimensions of selected recent frauds in India, analyses root causes from an accounting and governance perspective, and reviews corrective actions taken by professional accounting bodies (most notably the Institute of Chartered Accountants of India — ICAI), government agencies, regulators (RBI, SEBI), and the affected organisations themselves. The level of analysis is professional and technical, intended for qualified chartered accountants and audit professionals.
Scope and approach
The analysis focuses on prominent frauds and governance failures of the 2010s and early 2020s that had substantial accounting and auditing implications: the Punjab National Bank (PNB) Letter of Undertaking (LoU) fraud (2018), the Infrastructure Leasing&Financial Services (IL&FS) crisis (2018), the Punjab&Maharashtra Co-operative (PMC) Bank crisis (2019), the Yes Bank deterioration and alleged misstatements (2019–2020), and large-scale alleged frauds in certain housing finance companies including Dewan Housing Finance Limited (DHFL) (2019–2022). Each case is treated as an illustrative study to highlight accounting manipulations, disclosure failures, audit shortcomings and regulatory responses. The article also examines the more recent regulatory and professional measures — amendments to the Companies Act, strengthened oversight by SEBI and RBI, the creation and empowerment of the Serious Fraud Investigation Office (SFIO), and specific ICAI initiatives (forensic standards, fraud investigation cells, continuing professional education).
Case study 1: Punjab National Bank — the LoU system abuse
Background and accounting mechanics
In early 2018 Punjab National Bank disclosed that certain branch officials had issued undocumented Letters of Undertaking (LoUs) and foreign letters of credit in favour of certain corporate entities to obtain overseas credit from correspondent banks. These LoUs were not recorded in the core banking system and were routed through a back-office system maintained by certain staff. As a result, exposure of the bank to credit granted by overseas banks was materially understated. The consequence was a massive under-reporting of contingent liabilities and credit commitments in the bank’s financial statements and regulatory returns.
Accounting and auditing failures
From an accounting perspective, the key issues were (a) failure to recognise and disclose off‑balance sheet exposure created by LoUs and guarantees, (b) deliberate circumvention of internal controls and the core banking system, and (c) possible collusion between branch staff and external parties. Auditors of the bank, statutory and internal, were criticised for not detecting systemic control weaknesses and off-system liabilities earlier. The lack of proper reconciliation between SWIFT/foreign banker confirmations and the bank’s accounts was a central audit failing.
Consequences and corrective measures
Regulatory investigations, criminal prosecutions and recovery efforts followed. The Reserve Bank of India (RBI) and investigative agencies took action against individuals and entities involved. From an audit and professional perspective, the scandal prompted renewed emphasis by the ICAI and regulators on auditor independence, enhanced procedures for confirmation of balances and contingent liabilities, and stricter enforcement against professional misconduct.
Accounting lesson
For auditors, the PNB episode reinforced the imperative of designing substantive procedures to test the completeness assertion around guarantees, letters of credit and other contingent liabilities; it also highlighted the need for robust testing of reconciliations between bank records and correspondent bank confirmations. From a practitioner standpoint, this case illustrates how control circumvention can produce material understatement of liabilities, and why auditors must adopt skeptical, forensic mindsets when confronted with unusually warm relationships between branch staff and clients.
Case study 2: IL&FS — governance failure with accounting consequences
Background and the accounting dimension
The IL&FS group was a large infrastructure financing conglomerate whose default in mid-2018 precipitated liquidity stress across the financial system. IL&FS and various subsidiaries had extensive intercompany transactions, complex special-purpose vehicles (SPVs), and opaque related-party exposures. The crisis revealed that consolidated indebtedness, off‑balance-sheet obligations and group-wide related party transactions had not been adequately disclosed or managed. Accounting for revenue recognition across concession assets, valuation of receivables, provisioning policies and presentation of consolidated financial statements attracted close scrutiny.
Accounting and audit shortcomings
Several accounting issues were identified: insufficient provisioning for impaired receivables, overstatement of asset values and cash flows used to support recoverability, and inadequate disclosures regarding the nature and quantum of related-party and off-balance-sheet exposures. The audit process was criticised for insufficient challenge to management’s judgments on asset recoverability, for inadequate testing of related-party transactions, and for failure to assess group-wide liquidity risks.
Regulatory and corporate responses
The central government intervened by reconstituting the board, appointing independent members and triggering insolvency resolution processes for various group companies. SFIO and other agencies investigated governance and accounting irregularities. From an accounting profession perspective, this episode stimulated discussions on group consolidation, more rigorous auditing of related-party disclosures, and the need for auditors to evaluate management’s going concern assumption when default risks are significant.
Case study 3: PMC Bank — cooperative bank fraud and concealed exposure
Background and accounting manipulations
The PMC Bank crisis became public in 2019 when it was revealed that the bank had concealed large exposures to a single real estate group. Loans were allegedly siphoned through fictitious accounts, and the bank used creative accounting, off‑system entries and falsified asset quality reports to hide the concentration risk and non-performing status of advances. The bank’s financial statements and regulatory returns significantly downplayed NPAs and concentration risk.
Audit and internal control failures
The crisis exposed a combination of weak governance, poor internal controls, and failures of both statutory auditors and internal audit to detect manipulative entries. Cooperative banks often face structural governance challenges due to elected boards, and PMC’s example highlighted the need for greater audit scrutiny of related-party lending, single-client concentration, and verification of loan documentation (title, security, and borrower identity).
Regulatory corrective steps
RBI imposed a moratorium, superseded the board, and later facilitated reconstruction arrangements. The episode led to stronger supervisory focus on cooperative banks, enhanced regulatory reporting requirements, and a push for better data integration between core banking systems and supervisory returns. The ICAI and other professional bodies emphasised forensic accounting skills and urged members to exercise heightened professional scepticism in similar audits.
Case study 4: Yes Bank — aggressive accounting, governance lapses and supervisory intervention
Financial deterioration and accounting drivers
Yes Bank’s crisis was attributable to aggressive growth, inadequate provisioning and alleged misreporting of asset quality. Accusations included failure to timely recognise NPAs, aggressive classification of special mention accounts (SMAs), and complex restructuring packages that masked the true state of asset quality. The bank’s capital erosion and liquidity stress culminated in RBI stepping in with a reconstruction plan and management overhaul.
Auditors’ role and professional consequences
The Yes Bank case illustrated the difficulty auditors face when management uses novel restructuring or fitness-to-pay narratives that complicate impairment assessments. Auditors were called upon to assess the appropriateness of provisioning and the sufficiency of management’s disclosures. The ICAI and regulatory authorities examined professional conduct questions; meanwhile, the financial community debated whether earlier, more forceful audit action could have limited the severity of the failure.
Corrective frameworks and lessons
RBI’s resolution included a moratorium, capital infusion by a consortium led by a large public sector bank, and stricter oversight of banks’ provisioning practices. For auditors, the case reinforced the need for rigorous impairment models, stress testing of credit portfolios, and testing of management’s representations regarding restructuring terms and recoverability. It also highlighted the importance of early warning indicators and the auditor’s duty to communicate material concerns to regulators if necessary.
Case study 5: DHFL and NBFC fraud allegations — large-scale misstatement and circular financing
Background and accounting manipulations
Dewan Housing Finance Limited (DHFL) and some other NBFCs were later alleged to have engaged in practices that included diversion of funds to promoters, related-party lending through shell companies, fictitious loans (the so-called “Bandra books” in some reports), and systemic understatement of NPAs. The use of complex related-party networks to disguise ultimate beneficiaries and to create artificial retailing of loans to mask asset quality problems was a central allegation.
Accounting, audit and regulatory implications
Accounting issues included recognition of income from loans which were allegedly non-existent or were to related entities, failure to make adequate provisions, and inadequate disclosure of related-party networks. Auditors have faced investigations and scrutiny over possible failures to detect such patterns, while SEBI and other enforcement agencies have pursued promoters and connected parties for market manipulation and misrepresentation.
Regulatory and professional corrective steps
SEBI and the Ministry of Corporate Affairs have stepped up investigations, with asset attachments and prosecution in cases where misappropriation is alleged. For the accounting profession, DHFL reinforced the need for emphasis on forensic procedures, review of large related-party exposures, reassessment of revenue streams (particularly where income recognition is driven by management assertions), and closer attention to corroborative documentation.
Systemic root causes across cases
Several common themes emerge from these case studies. These systemic root causes are instructive for practitioners:
1. Weak governance and board oversight: Many failures stemmed from domineering promoters, insufficiently independent boards, and inadequate oversight by audit committees. Where audit committees were present, their functioning was sometimes perfunctory with inadequate engagement on related-party transactions and provisioning policies.
2. Collusion and control circumvention: The use of off-system entries and collusive layering of transactions made detection difficult for both internal controls and external auditors. Where staff colluded with promoters, traditional audit approaches were less effective.
3. Complexity and opacity: Use of SPVs, related-party chains and complex loan structures created opacity that obscured the economic substance of transactions. Consolidated financial statement presentation and disclosures were sometimes inadequate to capture this complexity.
4. Auditor limitations: Some auditors failed to sufficiently challenge management, over-relied on representations, or did not perform adequate substantive testing — particularly in areas of related-party exposures, confirmations, and valuation judgments.
5. Regulatory and supervisory gaps: Delayed recognition of stress, lag in supervisory intervention, and sometimes fragmentation between agencies allowed issues to compound until crises occurred.
Corrective actions by professional bodies, regulators and government
The cumulative experience of recent frauds prompted a range of responses aimed at strengthening detection, prevention and enforcement. The following sections summarise key corrective measures and their implications for accounting professionals.
ICAI initiatives and professional responses
1. Forensic and Investigative Accounting Standards: ICAI has taken steps to codify expectations around forensic accounting and fraud investigation, providing guidance on planning and procedures for investigations. This includes promoting Forensic Accounting and Investigation Standards (FAIS), specialised training, and the establishment of financial fraud investigation cells. (See ICAI press releases on national collaborations and fraud frameworks.)
2. Strengthened peer review and disciplinary processes: ICAI has emphasised peer review of firms, enhanced continuing professional education (CPE) on fraud risk, and has pursued disciplinary action against professionals where evidence of negligence or misconduct is found.
3. Guidance on auditor responsibilities: ICAI has issued advisory notes and quality control bulletins to reinforce auditor responsibilities for fraud detection, related-party testing, revenue recognition, and going concern assessments.
4. Collaboration with enforcement agencies: ICAI has been proactive in collaborating with SFIO, CBI and other investigative agencies to support investigations, provide expertise, and share best practices on forensic audit techniques.
Regulatory and statutory measures
1. SEBI reforms: SEBI expanded its surveillance and disclosure regime to strengthen corporate governance, enhanced related-party transaction disclosure norms, and increased penalties for market manipulation and false disclosures. Listing obligations and disclosure requirements (LODR) were tightened and enforcement actions against promoters and auditors have increased in frequency.
2. RBI supervisory enhancements: For banking and NBFC sectors, RBI introduced stricter asset classification and provisioning norms, enhanced supervisory stress testing, more frequent inspections, and special frameworks for early intervention and reconstruction. RBI also strengthened oversight on cooperative banks following the PMC crisis.
3. Companies Act amendments and SFIO empowerment: The government has considered and enacted amendments to the Companies Act that strengthen directors’ responsibilities, enhance criminal liability for fraud, and empower SFIO to investigate complex frauds. Greater powers to attach assets and expedite prosecutions have been pursued in several high-profile cases.
4. Insolvency resolution and recovery: Where fraud has precipitated insolvency, the Insolvency and Bankruptcy Code (IBC) processes and special insolvency benches have been used to recover assets and ensure transparent resolution, subject to legal scrutiny on avoidance transactions and preference claims.
Organisational and audit firm responses
1. Internal control remediation: Organisations implicated in frauds have undertaken remedial measures such as replacing management, restructuring boards, implementing stronger internal controls, and upgrading IT systems to prevent off-system manipulation.
2. Enhanced audit procedures: Audit firms have expanded their procedures in high-risk audits — mandating more rigorous confirmation practices (particularly in banking audits), forensic sampling, and independent verification of collateral and title documents.
3. Specialised training: Both firms and organisations have invested in training on forensic accounting, red flags for fraud, and data analytics to identify anomalous transaction patterns.
Practical and technical guidance for auditors and practitioners
Based on the lessons from recent frauds, the following practical guidance is offered to auditors and financial professionals. While not exhaustive, these measures should be considered best practice in high-risk engagements.
1. Emphasise completeness of liabilities and contingent obligations: For banks and corporates with exposure to guarantees and letters of credit, auditors should design procedures to reconcile off-system messages (SWIFT, correspondent confirmations) with the core ledger, examine manual overrides and test cut-off around period end.
2. Deep-dive into related-party networks: Auditors must map complex related-party chains, assess economic substance, and corroborate related-party transactions with third-party evidence. Where related parties are numerous or opaque, consider forensic sampling and background checks.
3. Use technology and data analytics: Apply transactional analytics to detect round-tripping, unusual counterparties, concentration of exposures, and pattern anomalies. Forensic analytics can reveal layered transfers among shell entities.
4. Strengthen audit committee engagement: Ensure audit committees are properly informed with independent audit findings, and where necessary, request external specialists to assist the committee in investigations. The effectiveness of the audit committee is a governance bulwark.
5. Improve confirmation procedures and corroboration: For banks, confirm directly with correspondent banks and reconcile messages. For receivables and loans, inspect underlying contracts, title documents and independent proof of cash flows.
6. Re-examine valuation and impairment judgments: Scrutinise management’s cash flow forecasts, discount rates, and stress scenarios. Valuation specialists should be engaged where asset valuation is judgemental and material.
7. Document scepticism and professional judgements: Maintain robust audit documentation demonstrating the exercise of professional scepticism, the rationale for judgments, and the basis for any reliance on management representations.
Numerical illustration (simple)
Consider a hypothetical bank with an unrecognised off-system LoU exposure of ₹1,200 crore that was not recorded in the balance sheet. Suppose the bank’s reported Tier-1 capital is ₹2,000 crore and risk-weighted assets (RWA) are ₹20,000 crore. The unrecognised exposure increases RWAs (assuming a 100% credit conversion factor for simplicity) by ₹1,200 crore. The bank’s Tier-1 capital ratio falls from 10% (2,000/20,000) to approximately 9.09% (2,000/21,200). In many regulatory regimes, such a fall could cross minimum capital thresholds and trigger supervisory action. This simplified example highlights how off‑system liabilities can have material solvency implications.
Assessment of effectiveness of corrective steps and remaining challenges
The combined regulatory, legislative and professional actions since the major frauds have certainly raised the bar for governance, audit quality and enforcement in India. The ICAI’s emphasis on forensic standards and enhanced peer review, SEBI’s stronger surveillance, RBI’s supervision improvements, and SFIO’s enhanced investigative reach have all contributed to a more deterrent environment.
However, challenges remain:
1.Implementation gaps: Laws and standards are only as effective as their implementation. Prompt, impartial enforcement and timely adjudication are necessary to sustain deterrence.
2.Auditor independence concerns: Concentration in audit market and fee dependence on large clients can impair perceived independence. Stronger rotation norms, transparent reporting by auditors and audit committees, and public discipline are needed.
3. Skills and capacity: Forensic accounting skills are still being built across the profession. Widespread adoption of data analytics and enhancement of investigative capabilities require time and investment.
4. Fragmented oversight: Multiple agencies are involved in investigation and enforcement; better inter-agency coordination and clear jurisdictional mandates reduce delays and duplication.
Recommendations for practitioners and regulators
A set of consolidated recommendations follows for immediate adoption by practitioners and for consideration by regulators:
For auditors and audit firms:
- Implement mandatory fraud risk workshops for every high-risk engagement and document fraud response plans.
- Use data analytics proactively in audit planning and execution, with particular emphasis on related-party flows and unusual transaction spikes.
- Strengthen confirmations and third-party verifications — do not rely solely on management representations where red flags exist.
- Maintain a culture of professional scepticism; involve senior engagement partners early when concerns emerge.
For corporate boards and audit committees:
- Require periodic forensic reviews for high-risk divisions and related-party exposures.
- Ensure true independence of audit committees via charter, powers to hire external advisors, and detailed reporting by external auditors.
For regulators and government:
- Expedite enforcement by providing specialized benches or tribunals for financial fraud cases to reduce adjudication time.
- Encourage public disclosures of enforcement outcomes to enhance deterrence.
- Support capacity building programs for forensic accounting within professional bodies and among regulatory staff.
Conclusion
Accounting frauds in recent times in India have been a powerful reminder that technical accounting standards, robust auditing and vigilant governance must work in tandem to protect stakeholder interests. The high-profile failures examined in this article illustrate a recurring interplay of governance weakness, management override, opaque structures, and audit limitations. While regulatory and professional corrective actions over the last several years have strengthened the institutional response, the onus remains on practitioners — chartered accountants, auditors, audit committees and corporate boards — to adopt forensic mindsets, deepen analytical capabilities and insist on transparent disclosures. Only through a sustained culture of governance, strengthened audit processes and effective enforcement can the recurrence of systemic accounting fraud be meaningfully reduced.
References and further reading
(Selected public sources and regulatory releases consulted while preparing this article include public reports and press releases by the Institute of Chartered Accountants of India (ICAI), Reserve Bank of India (RBI) notifications and press statements, Serious Fraud Investigation Office (SFIO) reports, SEBI enforcement orders, and credible press coverage from established financial publications on PNB, IL&FS, PMC Bank, Yes Bank and DHFL cases.)
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