Facilitating Decision Making through Forensic Audit for Granting Loans and Detecting Frauds in Banks

In 2021, the Indian economy is predicted to grow at a rate of 11.5 percent, making it one of the fastest-growing economies in the world. The Banking Sector, like any other economy, is the backbone of the Indian economy. Since the advent of banking sector reforms and economic liberalization in 1991, it has witnessed significant growth. Even though the Reserve Bank of India effectively regulates banks, the speed in growth brings inefficiencies in the systems due to the sheer number of transactions and the need to provide loans quickly. This results in offering Loans to various sectors without focusing on the quality of loan advances, thereby resulting in a rise in fraud in the financial industry. In the last 10-12 years, there was a considerable jump in fraud cases, especially in loans and advances, as per RBI's annual report. The Reserve Bank of India mandated banks to use forensic auditing as a fraud prevention and investigation tool in May 2015. It is gradually gaining traction as a novel and powerful tool for auditors to detect fraud early on. This paper aims to understand the role of Forensic Auditing in unearthing Bank frauds, especially while making decisions for granting Loans and Advances area like detection of frauds, by using literature review methodology, exploratory and case study analysis to give more insights into Forensic Auditing

I. Introduction

In the last few years, instances of fraud have increased manifold times. RBI defines fraud as ‘A intentional act of omission or commission committed by any individual in the course of a banking transaction or the books of accounts maintained manually or electronically in banks, resulting in unlawful benefit to any person for a temporary period or otherwise, with or without monetary loss to the bank.’ The Indian banking industry has, over the years, experienced a large number of financial frauds involving large amounts of money. Bank fraud can take numerous forms, including fraudulent loans, identity theft, card skimming, phishing, vishing, forgeries, and more.