Forensic auditors come knocking on startups’ doors as sharp investors try to get things done early

Previously, private equity and venture capital funds hired forensic auditors only after financial mismanagement and corporate governance issues emerged.

“We are certainly seeing a bullish trend in the volume of forensic investigations and reviews on portfolio businesses, fuelled by the impetus of the investor community at large, including private equity funds and venture capitalists. Over time, the investor community has built a mature view towards forensic activities and positive acceptance towards the commissioning of such referrals,” said Geetu Singh, partner at KPMG in India.

“There is a conscious recognition that forensic activities are fundamentally a fact-discovery mechanism and are now considered a ‘necessary’ risk control measure in the investment lifecycle,” Singh said.

Over the past two years, investors have ordered forensic audits of prominent startups like BharatPe, Byju’s, GoMechanic, Trell and Zilingo after allegations of fraud, financial mismanagement and corporate governance lapses. But now, investors are stepping in early.

“Previously, most forensic investigations were conducted as part of new fundraising rounds where new investors would ask for due diligence reports on their prospective investments. But now, existing portfolios are being scrutinised by these investors,” said the head of forensic services at a global consulting firm, speaking on condition of anonymity.

Global investors recently requested forensic audits of medical technology companies after whistleblowers found that executives had inflated revenue, the person said. Media technology companies have been audited for alleged revenue misappropriation. Beauty and personal care companies and health care companies have also requested such audits after concerned investors.

Identifying and managing red flags promptly is key to building organizational resilience, said Puneet Gurkel, partner and leader, forensic services, PwC India. He said forensic information and analytics are playing a key role in this rise in proactive audits.

“Reactive audits focus on getting to the root of fraud and gauging the scope of damage after an organization is hit by a crisis. Indian companies have witnessed many such instances in recent years where reactive forensic audits have uncovered systemic, technical and sometimes cultural gaps that lead to fraud,” Gerkel said. Progressive companies are rethinking risks, learning from such reactive audits taking place in the business ecosystem and proactively assessing whether their internal checks and balances are strong and future-proof to avoid such crises themselves, he said.

“Overall, we are seeing a similar increase in demand for forensic audits of both natures, and we are investing aggressively in this area from both a technology and talent perspective,” Gerkel added. PwC sees forensics as a promising area and is adding staff and investing in it in its growing business.

Besides investors, Indian banks and market regulators frequently order forensic audits to get to the bottom of suspicious financial transactions.

An early stage investor, on condition of anonymity, said investors have become sceptical after losing billions in investments in companies like Bijoux, Bharatpe and Zilingo. “New investors are becoming more sceptical and due diligence is now taking more than four-five months. Only in blue-chip companies with better governance standards is there some hope for liquidity,” the investor said, on condition of anonymity.

According to KPMG’s Singh, such audits also strengthen relationships between investors and portfolio companies, as real-time transparency increases mutual trust and confidence.

“Given this, forensic advisory services have certainly expanded significantly to cope with the increase in activity, not just through increased competencies of forensic experts but also through the introduction of more diversified skill sets, advanced forensic techniques and AI powered by data analytics to cover a multitude of complex aspects in investigations,” Singh said.