Companies
Forensic auditors at startup doors as edgy investors look to fix issues early
Summary
- In the last two years, investors have ordered forensic audits at high-profile startups such as BharatPe, Byju’s, GoMechanic, Trell and Zilingo after cases of fraud, financial mismanagement, or corporate governance missteps. However, now, investors are stepping in early.
Mumbai: Private investors are bringing in forensic auditors early to scan the books of portfolio companies after serial implosions at high-profile startups crushed valuations and wiped out investments. According to investors and auditors, the aim is to detect and fix issues before it becomes too late to put out the fire.
Earlier, private equity and venture capital funds hired forensic auditors only after financial mismanagement and corporate governance issues surfaced.
“There has certainly been a bullish trend in the quantum of forensic investigations and reviews on portfolio businesses, as triggered by the investor community at large, including private equity funds and venture capitalists. The investor community has developed a mature outlook towards forensic activity and a positive acceptance on commissioning of such mandates over a period of time," said Geetu Singh, a partner at KPMG in India.
“There is a conscious acknowledgement that forensic activity is fundamentally a fact-finding mechanism, and now seen as a "need to have" risk management instrument in the investment lifecycle," Singh said.
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In the last two years, investors have ordered forensic audits at high-profile startups such as BharatPe, Byju’s, GoMechanic, Trell and Zilingo after cases of fraud, financial mismanagement, or corporate governance missteps. However, now, investors are stepping in early.
“Earlier, most forensics were being done as part of a new funding round where an incoming investor was seeking diligence report on the prospective investments. But now, the existing portfolio is being scrutinized by these investors," the head of forensic services at a global consulting firm said on condition of anonymity.
The person cited above said that recently, a global investor requested a forensic audit of a medtech company after a whistleblower complaint, which exposed how the management had inflated revenues. A media tech company was audited over suspicion of round-tripping of revenue. A beauty and personal care company and a healthcare company too saw anxious investors ordering such audits.
Identifying and managing red flags promptly is central to building organizational resilience, said Puneet Garkhel, partner and leader, forensic services, PwC India. Forensics intelligence and analytics are playing a key role in the rise of such pro-active audits, he said.
“Reactive audits focus on getting to the genesis of the fraud and gauging the extent of damage after a crisis hits an organization. India Inc. has witnessed many such instances in the recent past with reactive forensic audits exposing systemic, technological and sometimes cultural gaps that have led to fraud," Garkhel said. Progressive companies rethink risks and learn from such reactive audits happening in the business eco-system to proactively assess if their internal checks and balances are fool-proof and fit for future to avert such crises for themselves, he said.
“Overall, we see an equal increase in demand for forensic audits of both nature and we are investing in this area aggressively, both from a technology and talent standpoint," Garkhel added. PwC has identified forensics as a promising avenue and is increasing its headcount growing business and is investing behind it.
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Apart from investors, banking and market regulators in India have frequently ordered forensic audits to get to the bottom of suspect financial transactions.
Investors have turned sceptical after they lost billions of dollars invested in Byju’s, BharatPe, Zilingo and others, an early-stage investor said on the condition of anonymity. “Incoming investors are increasingly sceptical, and due diligence now spans more than 4-5 months. Only in good companies with better governance standards, there is some hope of a liquidity," the investor said on condition of anonymity.
According to Singh of KPMG, such audits also strengthen the relationships between investors and the portfolio businesses, since real-time transparency raises trust and confidence in each other.
“In light of this, forensic advisory practices have certainly scaled up significantly to cope with the increased activity, not just by way of an increase in strength of forensic practitioners, but also introduction of a more diverse skill set, advanced forensic technology and AI leveraging data analytics, in order to cover multitude of complex dimensions in an investigation," Singh said.
