Listed companies are required to disclose initiation of and the final report for forensic audits pursuant to the amendments to the Listing Regulations on October 8, 2020.

1.     Disclosure of Initiation of Forensic Audits

 The Securities and Exchange Board of India (SEBI) has introduced disclosure requirements under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (Listing Regulations) for forensic audits to address gaps in the availability of such information. Listed companies are now mandatorily required to disclose the fact of initiation of the forensic audit, along with: (a) the name of the entity initiating the audit; and (b) the reasons for initiation of the audit, if available.

2.     Disclosure of Final Report

Listed companies are also mandatorily required to disclose the final forensic audit report on receipt by the listed entity, along with comments of the management, if any. This report need not be disclosed for any forensic audit initiated by regulatory or enforcement agencies.

3.     Timing of Disclosure

These disclosures are required to be made as soon as reasonably possible and not later than 24 hours from the occurrence of the event or information.

Key Issues and Implications

•    Listed companies are already required to disclose frauds and defaults that are committed by key managerial personnel, directors or employees under the Listing Regulations once established. Requiring disclosure at the time of mere initiation of investigation (without waiting for any prima facie view from the findings) could have unintended consequences. For instance, such disclosure could cause price fluctuations and losses to investors, or hamper the reputation of the company and the employees that are the subject matter of investigation (before there are any adverse findings).

•      Further, the Listing Regulations do not expressly state whether this disclosure requirement is applicable to all forms of investigation reports or only for forensic audit on financial statements.

•    The requirement to disclose the final report could impact the confidentiality of witness statements. For instance, it could discourage employees from disclosing matters.

•      Thus, listed companies will have to be careful to ensure that they meet the requirements under the Listing Regulations but at the same time do not impede the forensic audit.