NFRA Probes IndusInd Bank Auditors Over Suspected FX Derivatives Irregularities: A Deep Dive

In a significant move aimed at ensuring audit integrity and financial transparency, the National Financial Reporting Authority (NFRA) has issued notices to both current and former auditors of IndusInd Bank. The action comes in response to suspected accounting irregularities tied to foreign exchange derivatives, which may have led to inflated profits or concealed losses in the bank’s financial statements over a span of several years.

This case has triggered widespread debate in the auditing and financial community about the role and accountability of auditors, especially in complex areas like derivatives trading, and the responsibility of the bank’s management in providing transparent financial disclosures.

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What Triggered the Investigation?

The primary red flag was raised around IndusInd Bank’s derivatives book—a complex section of banking operations dealing with foreign currency trades. According to insider reports, some of these transactions were misstated intentionally to:

• Boost the bank’s reported profits during favorable market conditions, or
• Hide losses during downturns.

These alleged discrepancies may date back as far as 2017 and involve senior bank officials. The NFRA took note after concerns grew about the consistency and reliability of the bank’s financial reporting practices.

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NFRA’s Course of Action

The NFRA issued notices to several prominent auditing firms who audited IndusInd Bank from 2015 to 2024, including:

• PwC (2015–16 to 2017–18)
• S.R. Batliboi & Co. (EY affiliate) (2018–19)
• Haribhakti & Co. (2019–20 to 2020–21)
• M P Chitale & Co. (2021–22, and joint auditor in 2023–24)
• MSKA & Associates (BDO affiliate) – Current auditor

The NFRA has requested that these firms submit complete audit documentation, including:

• Audit working papers
• Risk assessments
• Correspondence with the bank
• Methodology used to verify derivatives transactions

The goal is to determine whether the auditors failed in their duty to detect and report anomalies, or whether they were misled by the bank’s internal departments.

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Key Concerns Raised

1. Ambiguity Around Auditor Accountability

Were auditors truly unaware of the irregularities? Or did they overlook or ignore red flags to avoid conflict with the client? The NFRA aims to answer this.

2. Removal of Key Audit Matter

A particularly controversial move was the removal of the valuation of derivatives from “Key Audit Matters” in IndusInd’s 2024 annual report. It had been a focus area in previous years—raising questions about why the risk focus shifted despite growing scrutiny.

3. Audit Committee Oversight

Experts argue that the bank’s audit committee and senior management should also be held accountable. According to NFRA guidelines, the audit committee is responsible for:

• Reviewing critical accounting estimates
• Assessing management’s assumptions
• Detecting biases and misreporting risks

There is growing speculation that the management may have withheld full information from the auditors—especially from treasury and finance departments.

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Industry Reactions

The accounting community is split:

🔸 Some say: The complexity and volume of derivatives trades could make it genuinely difficult for auditors to detect anomalies without deeper investigation or whistleblower alerts.

🔸 Others argue: Auditors should have been more skeptical, especially when unusual gains or unexplained transactions appear in “Other Assets.”

Several auditing professionals have called for more robust audits of financial derivatives, given the opaque nature of these instruments and their potential to distort financial results.

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Background Summary

• Suspected irregularities surfaced in IndusInd Bank’s foreign exchange derivatives book.
• The bank allegedly used derivatives to manipulate profits/losses between 2017 and 2024.
• Multiple audit firms reviewed these accounts over the years but failed to raise concerns.
• NFRA is now investigating whether this failure was due to negligence, incompetence, or miscommunication.
• Auditors have been asked to justify their risk evaluation and audit procedures.

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FAQs

Q1. What is NFRA’s role in this case?
The National Financial Reporting Authority is responsible for regulating and overseeing auditors of large public interest entities. It ensures audit standards are followed and investigates failures or misconduct.

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Q2. What are the allegations against IndusInd Bank?
The bank allegedly used foreign exchange derivatives to hide losses or show artificial profits, distorting the financial position reported in audited statements.

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Q3. Why are the auditors being investigated?
Auditors are required to verify all financial data, especially in high-risk areas like derivatives. If they failed to detect anomalies or ignored red flags, they could be guilty of audit negligence or misconduct.

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Q4. Can audit firms be penalized?
Yes. If NFRA finds evidence of negligence, collusion, or poor audit standards, it can penalize firms, bar auditors from practice, and recommend further action.

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Q5. Will IndusInd Bank face consequences too?
Potentially yes. If the bank’s management is found to have deliberately misled auditors or withheld information, regulatory action may follow from RBI, SEBI, or the Ministry of Corporate Affairs.

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Conclusion

The IndusInd Bank audit controversy is more than just a regulatory investigation—it’s a critical test of audit accountability in India’s financial system. As the NFRA digs deeper into audit documentation and internal decision-making processes, the outcome may reshape how banks, auditors, and audit committees interact in complex financial environments.

The case also reinforces an urgent need for:

• Enhanced transparency in financial statements
• Deeper risk analysis in auditing
• And stronger checks on management disclosures

📅 Published on: 25 June 2025
✍️ Author: CS Chhavi Goyal