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SEBI: Submission highlighting challenges in complying with disclosure requirements in case of initiation of forensic audit on listed companies

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As you may be aware, Securities and Exchange Board of India (SEBI) recently issued Press Release No. 52/2020 dated September 29, 2020, which requires listed companies to make disclosure to stock exchanges of forensic audits without application of materiality. Such disclosure is required to be made in case of initiation of forensic audit as well as the final audit report and comments of the management, once the audit is completed.

Based on inputs received from industry, we have highlighted the following issues to SEBI:

A. Issues in disclosure relating to initiation of forensic audit of listed company:

  1. The requirement of disclosure in case of initiation of forensic audit to stock exchanges can have an unintended effect of harming the interest of the Company without any corresponding public benefit. For example:
    a) In case the investigation results in no fraud/wrongdoing, a premature disclosure will impact the reputation of the company, thereby resulting into undue damages to the company; and
    b) It may mislead investors, thereby leading to market capital erosion for the company, or cause fluctuation in price or trading patterns in the shares of the company. This can also result in reputational and financial damage to the company.
  2. Based on experience of our industry companies in dealing with government authorities worldwide, we believe that the practice of disclosure of initiation of forensic audit is probably unprecedented. The requirement is also against the disclosure requirements prescribed by SEBI under Chapter 2 of SEBI (Listing Obligations and Disclosure Requirements) regulations, 2015 (SEBI LODR) on “Principles governing disclosures and obligations of listed companies”.
    • Chapter 2 of SEBI LODR provides that a listed company is obligated to disseminate accurate, adequate and timely information to the investors, and refrain from misleading or misrepresenting to the investors/ stock exchanges.
    • All events/ information that are ‘deemed to be material’, and enumerated in Schedule III, Part A, Para A of the LODR require disclosure only once a decision has been taken or an outcome has been reached with finality.

B. Issues in disclosure of forensic audit report:
The audit report may contain proprietary information such as client information, details of contract, internal policy of the company, etc. It may also contain details of witnesses who have provided information and evidence during the course of the audit. There are no safeguards provided to enable certain necessary precaution and protection in relation to the disclosures with respect to the forensic audit reports.


Based on the above issues, NASSCOM has made a representation to SEBI requesting for the following:

  1. In case of disclosure related to initiation of a forensic audit, the requirement should be limited to such audits initiated by the Indian regulatory agencies.
  2. In case of the disclosure with respect to the contents of a forensic audit report, the disclosure requirements should be limited to the summary of forensic audits on conclusion of the audit, in case any wrong doings are found. The disclosure should also provide for the following safeguards:
    •  To maintain the privacy of individuals a company may withhold personally identifiable information including names and titles of individuals who may be named in the disclosure related to the initiation of forensic audit.
    • To ensure that the forensic audit is carried out in a holistic manner and has full participation and cooperation of witnesses, the company may redact all personally identifiable information (including witness names and identities as eventual disclosure of witness details in the report may inhibit their co-operation during the audit stage), company confidential information, competitive information, and other business sensitive information. This would ensure that such information does not fall into the hands of un-authorised individuals or wrong doers.

We will keep you posted on further developments in this regard.

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