Forensic audit validity turns on statutory auditor qualifications, and an unqualified report cannot sustain fraud proceedings.

A forensic audit report used as the sole basis for show-cause notices and fraud proceedings must be prepared and signed by persons meeting the statutory qualifications applicable to auditors. The Bombay HC read the RBI framework harmoniously with the Companies Act, 2013, and noted that an auditor must be a Chartered Accountant and, where a firm or LLP acts as auditor, the authorised signatory must also be a Chartered Accountant. Because the report was signed by a non-Chartered Accountant and the firm was not an ICAI-registered Chartered Accountants firm, the Court treated the report as legally infirm. Later RBI Master Directions were described as clarificatory and incapable of curing that foundational defect, so interim protection was granted against further action based on the report.

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Issues: Whether the Forensic Audit Report could validly form the basis of the show-cause notices and consequential fraud proceedings when the report was prepared and signed by an entity and signatory who were not qualified Chartered Accountants under the relevant statutes, and whether the banks could rely on the 2024 RBI Master Directions to sustain such action.

Analysis: The challenge raised was to the very foundation of the proceedings, namely the competence of the forensic auditor and the legal validity of the report. The Court held that the expression "external auditor" in the RBI framework had to be read harmoniously with the applicable statutory qualifications, particularly the Companies Act, 2013, which requires that only a Chartered Accountant may be appointed as auditor and that, where a firm or LLP is appointed, the partner authorised to sign must also be a Chartered Accountant. It was found that the report had been signed by a person who was admittedly not a Chartered Accountant, and that the firm itself was not a Chartered Accountants firm registered with ICAI. The Court further found that the later RBI directions, including the footnote referring to auditors qualified under relevant statutes, were clarificatory and could not be used to sustain an otherwise infirm report; the report was also treated as the sole foundation for the impugned notices and consequential steps. The Court rejected the limitation and waiver objections at the interim stage and held that the plaintiff had made out a strong prima facie case, with balance of convenience and irreparable injury also favouring protection against further action based on the impugned report.

Conclusion: The report and the consequential show-cause and fraud-related actions were held not fit to be allowed to continue at the interim stage, and interim relief was granted in favour of the plaintiff.

Ratio Decidendi: Where a forensic audit report is the foundation of fraud proceedings, it must be prepared and signed in conformity with the statutory qualifications governing auditors; a report issued by an unqualified signatory cannot be relied upon to sustain coercive action, and later clarificatory regulatory language cannot cure that foundational defect retrospectively.

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