Regulator plans forensic audit of housing finance companies

With some housing finance companies coming under fire for alleged fund diversions, the sector’s regulator is keen on getting to the bottom of it with National Housing Bank (NHB) planning a special/ forensic audit of Housing Finance Companies (HFCs). The move comes in the backdrop of reports that some HFCs have siphoned off funds by granting loans and advances to shell companies, and entities linked to promoters.

Usually, a forensic audit is an examination and evaluation of a firm’s financial information for use as evidence in the court. A forensic audit can be conducted in order to prosecute a party for fraud, embezzlement or other financial claims. Such audits are done to unearth discrepancies in financial statements, which may have been overlooked due to lack of specialisation or wilful oversight.

While NHB is tight-lipped on the special/forensic audit, sources said that it has already begun the process of empanelment of CA firm/ company for special/forensic audit of HFCs. “An RFP (request for proposal) has been floated by NHB’s Department of Regulation & Supervision on the same some days ago,” the sources said. An NHB document says that the scope of special/forensic audit work will be mentioned specifically at the time of inviting commercial proposals.

It may be noted that forensic auditing is relatively new in India, though both the government and financial regulators increasingly commission such exercise post-emergence of serious allegations regarding possible fraud. “It is a general procedure when such things come up. Housing finance companies whose books are clean have nothing to worry about. You may recall banks, which faced fraud, have in recent past taken the help of audit agencies to do forensic auditing,” said an auditor. Housing finance companies were not immediately available for comment when DNA Money reached out to them.

The Enforcement Directorate (ED) and the Serious Fraud Investigation Office (SFIO) have underscored the need for forensic audit following the rise in money laundering and wilful default cases in the banking sector. “With fund diversion allegations emerging in the HFC space, this may be NHB’s way of addressing the confidence of crisis issue. Already, some banks have taken steps to conduct a forensic audit on exposure to a certain HFC. Post the forensic audit results for the entire HFC sector, a regulatory stamp on the books would surely help,” says a senior executive of a housing finance company, refusing to be identified.

National Housing Bank (NHB), a statutory institution, is a wholly owned subsidiary of the Reserve Bank of India, established under National Housing Bank Act, 1987. Apart from promoting a network of dedicated housing finance institutions to adequately serve various regions and different income groups, NHB is also tasked with regulation of housing finance companies based on regulatory and supervisory authority derived under the Act. The head office of NHB is located in New Delhi and a regional office located at Mumbai. It has representative offices located at Hyderabad, Bengaluru, Kolkata, and Ahmedabad.