The unregulated real estate sector came to be regulated by The Real Estate (Regulation And Development) Act, 2016 (RERA). RERA enacted for regulation and promotion of the real estate sector. Further, to ensure sale of plot, apartment or building, as the case may be, or sale of real estate project, in an efficient and transparent manner and to protect the interest of consumers in the real estate sector. After almost two years of RERA it is observed that the promoters of the real estate project have been penalised for delay in possession and also not providing of facilities as promised. Another, big issue is of the completion due to dried funds in the kitty.

In this background, where forensic audit is considered as a need of the hour and some of the RERA Authorities have ordered Forensic audit, it is imperative to analyse the importance of forensic audit under RERA. Combining the object of RERA with Forensic audit shall yield result as various authorities under different law have been able to achieve objects.

Forensic Audit

A forensic audit is an examination and evaluation of a firm’s or individual’s financial information for use as evidence in the court of law. A forensic audit can be conducted in order to prosecute a party for fraud, embezzlement or other financial claims. In order to understand the legal consequences that a person attracts on being caught in a forensic audit, it is necessary to know about the various statutes that talk about the implementation of forensic audits in India.

Collin[1] Greenland defines that forensic accounting (or auditing) is the integration of accounting, auditing and investigative skills in order to provide an accounting analysis suitable for the resolution of disputes (usually but not exclusively) in the courts.

Cressy19[2] (2012) in his paper explained that in forensic auditing specific procedures are carried out in order to produce evidence.Audit techniques and procedures are used to identify and to gather evidence to prove, for example, how long have fraudulent activities existed and carried out in the organization, and how it was conducted and concealed by the perpetrators. Evidence may also be gathered to support other issues which would be relevant in the event of a court case.

Forensic audit and financial audit

Major difference between Audit and Forensic Audit is discussed as below

  • Objective of financial auditing is to express opinion as to ‘true & fair’ presentation. Forensic Audit determines correctness of the accounts or whether any fraud has actually taken place.
  • Techniques used in the financial auditing are more of ‘Substantive’ and ‘compliance’ procedures. The techniques used in the forensic auditing are analysis of past trend and substantive or ‘in depth’ checking of selected transactions.
  • Normally all transactions for the particular accounting period are covered under the financial audits. Forensic audits don’t face any such limitations. Forensic auditors may be appointed to examine the accounts from the beginning.
  • For ascertaining the accuracy of the current assets and the liabilities financial auditor relies on the management certificate or representation of management. Forensic auditors are required to carry out the independent verification of suspected or selected items.
  • Whenever the financial auditor has adverse findings, then the auditor expresses the qualified opinion, with/without quantification. In case of the adverse findings, the forensic auditors are required to quantify.

Powers with Real Estate Regulatory Authority (RERA)

RERA authority has power to call for information and call for investigation and hence the cases where there is allegation of fund diversion, authority can very well call for information and order for investigation. Act also empowers the authority to take help of experts and therefore the utilisation of forensic auditors can come to rescue of the buyers.

35. Powers of Authority to call for information, conduct investigations.—

(1) Where the Authority considers it expedient to do so, on a complaint or suo motu, relating to this Act or the rules or regulations made thereunder, it may, by order in writing and recording reasons therefor call upon any promoter or allottee or real estate agent, as the case may be, at any time to furnish in writing such information or explanation relating to its affairs as the Authority may require and appoint one or more persons to make an inquiry in relation to the affairs of any promoter or allottee or the real estate agent, as the case may be.

RERA authority also enjoys the power of civil court and therefore can ask for information and also require the attendance of the concerned.

UP RERA order for forensic audit

The Greater Noida bench of Uttar Pradesh Real Estate Regulatory Authority on Tuesday ordered a forensic audit of Concept Horizon Infra Pvt Ltd, a builder who has failed to deliver a mixed-use project, Orizzonte, located in Knowledge Park. Nearly 40 buyers, who invested in Orizzonte, moved UP-Rera against the builder. [3]

The order came after the builder failed to furnish an adequate response explaining why it failed to pay assured returns to the buyers or how it plans to complete the project which is already overdue by over two years.

In another matter, UP RERA has issued show cause notices to Ansal Properties & Infrastructure Limited (Ansal API) for alleged fraud and diversion of funds along with other anomalies in their four projects worth over Rs 600 crores. The notices were served under Section 35 along with Section 7 (2) for violation of Section 4, 7 and 11 of the Real Estate (Regulation and Development) Act, 2016, official sources here on Monday said. In October 2018, the Authority ordered direction for forensic audit in registered projects with a view to investigate into the affairs, especially the accounts of Ansal API to find out the possible diversion of funds, causes of inordinate delay, assign responsibilities etc. [4]

The show cause notices have been issued to the developer following a report submitted by forensic auditor that had investigated 91 projects of Ansal API over the last three months for financial misappropriation. The auditor had submitted its report where it has stated that under Ansal API, the projects have found to be in breach of RERA compliances, managing separate accounts, half yearly project account audit and a possible diversion of over Rs 600 crores from the projects to other purposes.

Kerala RERA empanelment for Forensic auditors

Kerala RERA authority has also issued empanelment for the forensic audit and invited the Chartered Accountant firms for empanelment. It is welcome move that the auhtorites have started doing the empanelment and shall time to come the vigilance shall lead to discipline in the real estate industry.

SC Amrapali case [5]

SC had appointed forensic auditors for analysing the fund diversion in the Amrapali group. Forensic auditors, Pawan Agrawal and Ravi Bhatia, told the court that they have found that over Rs 3,500 crore of home buyers’ money was diverted by Amrapali promoters[6].
They said over 100 shell companies were formed by the group to divert the home buyers money. The bench said it cannot allow public interest to be jeopardised and would like to decide as how to make the Amrapali Group liable for payment.
It said the group has a liability of over Rs 5,000 crore towards the Noida and Greater Noida authority and has to decide the legal question as to how the title of their properties can be given to the home buyers.

It had asked the real estate firm and its directors to either deposit the diverted money or be ready for consequences. Earlier, the apex court had grilled the CMD for the fact that Rs 94 crore of home buyers was being shown in his personal bank account.

Conclusion

The above discussion makes it clear that the Forensic audit is a new tool in the hands of RERA authorities to unearth the wrong done and also the recent judicial trends are in the favour of the homebuyers who were at the receiving end previously. Now, the attachment of personal properties of the promoters and also the independent directors as ordered in the matter of Jaypee Infratech also makes it clear that the things are not the same and the white collar crimes are taken with iron hands. Forensic audit should be made mandatory in the case of projects are delayed beyond a reasonable time. It is also an opportunity for the Financial Professionals (CA/CS/CWA)as they appear to be well equipped with Financial and Legal aspects.

AuthorsAdv. (CA) Nipun Singhvi and CA Mahadev Birla

Adv.(CA.) Nipun Singhvi is practicing advocate at various Tribunals, High Courts and Supreme Court. He has also done Certified Forensic Accountant and Fraud Detection (ICAI) and can be reached at nipunsinghvi@yahoo.com

CA.Mahadev Birla       is RERA consultant and has been  part of senior management for real estate company for 6 years. He can be reached at md.birla@gmail.com 

[1] Collin Greenland (2001), Demystifying Forensic Accounting, The Weekend Observer, Pg. 5, December 7, 2001

[2] See, Hubar Dennis (2016), Forensic Accounting, Fraud Theory, and the End of the Fraud Triangle Journal of Theoretical Accounting Research, 12(2), 28-48, 2017.

[3] Times of India January 16, 2019

[4] http://www.uniindia.com/up-rera-issues-notices-to-ansal-api-for-fraud-diverting-rs-600-cr-funds/north/news/1548116.html

[5] https://economictimes.indiatimes.com/news/politics-and-nation/supreme-court-irked-over-circulation-of-forensic-auditors-report-on-amrapali-before-filing/articleshow/68799677.cms?from=mdr

[6] https://www.moneycontrol.com/news/india/amrapali-case-sc-accepts-forensic-report-detailing-siphoning-of-homebuyers-money-3916951.html

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