Transaction Auditor explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Avoidance applications almost always rest on a transaction audit, yet the Code never requires one. The decision to appoint, the scope, the fee and the sharing of the report are all matters of judgement — exercised with the committee, not around it.
The appointment is discretionary
- It is nowhere provided under the Code or the regulations that an IRP, RP or liquidator is required to appoint a transactional auditor or forensic auditor.
- Under section 20(2)(a) the IRP or RP has the authority to appoint accountants, legal or other professionals as may be necessary.
- The IRP or RP cannot be assumed to be an expert in the identification and determination of avoidable transactions.
Those three statements taken together explain the practice. The professional carries a statutory duty under section 25(2)(j) to file avoidance applications and a Regulation 35A timetable to meet, is not assumed to have the specialist skill, and has an express power to buy it in.
The Background Material identifies the situations in which the appointment should not be made:
- there are no transactions in the corporate debtor to be verified;
- the books of account are not available; or
- no asset is found under the ownership of the corporate debtor, or none worth recovering.
Each is a case where the estate would pay for an exercise that cannot produce a recovery. The second is the one that requires judgement rather than observation — missing books may mean there is nothing to audit, or may itself be evidence of a section 66 case, and the professional has to decide which.
The fee, and the committee's role
- The fee of any professional appointed by the IRP or RP is to be ratified by the committee of creditors, so the committee's indulgence in the appointment process cannot be avoided.
- The fee may be linked to the scope of work — for example the number of years to be audited — and that too may involve the committee.
- The committee can highlight certain events or transactions to the auditors or the professional, and may wish to see the proper identification of transactions.
- The professional needs to maintain transparency, so sharing the report with committee members may be desired; it is not prohibited by the regulations or the Code.
Ratification after the event is a poor way to run this. Because the fee needs the committee's approval, the sensible course is to take the scope and the fee to the committee before engaging the transaction auditor — which also captures the committee's own knowledge of the transactions worth examining.
Management cooperation is the recurring obstacle
Five problems recur, and a transaction auditor should expect all of them:
| Problem | How it manifests |
|---|---|
| Lack of information | Insufficient access to essential records when the professional takes over |
| Software access | Passwords for critical systems unavailable — an ERP that is non-functional because the annual fee was unpaid and whose technical personnel have left |
| Delayed proceedings | Applications under section 19(2) proving ineffective, delaying the audit and affecting the timeline |
| Filtered information | Information provided by promoters is selective, limiting the auditors' ability to investigate |
| Borrower cooperation | Banks struggle to obtain cooperation, though it may be more forthcoming while loan proposals are pending |
The ERP example deserves attention because it is not obstruction at all. A company in distress stops paying software renewals long before it stops trading, and the technical staff leave with the salary arrears. The records exist and are simply unreachable — which is a cost line in the audit scope, not a section 19 application.
The forensic engagement approach
- Initial assessment. Understand the client's business environment, operational processes and internal controls; review previous audits and conduct background checks on management and key personnel to identify risks.
- Data collection. Gather financial statements, secretarial records, legal documents, bank transactions and other records bearing on financial health and irregularities.
- Site visits. Observe operations first-hand and engage directly with employees, to identify discrepancies not evident from documents.
- Interviews. Gather qualitative data from employees and stakeholders, which can reveal the culture and internal pressures contributing to misconduct.
- Identifying avoidance transactions. Review contracts and agreements for irregularities or signs of manipulation.
- Exception reporting. Document anomalies for further investigation, focusing effort where deeper scrutiny is warranted.
- Review of statements and records. Analyse financial statements, secretarial records, legal documents and bank data to identify fraudulent reporting or asset misappropriation.
- Reporting. Draft a report with the observations, the evidence substantiating findings, the financial losses incurred and recommendations for improved internal controls.
Practical points
- Take the scope and fee to the committee before engaging the transaction auditor.
- Link the fee to a defined scope — years of audit, entities, heads of account.
- File the section 19(2) application early and keep it alive; its pendency is part of the record in the eventual avoidance application.
- Share the report with the committee unless there is a specific reason not to.
- Where books are unavailable, record what was sought, from whom and with what result.
Common mistakes
- Appointing a transaction auditor reflexively where there is nothing to recover.
- Engaging first and seeking fee ratification afterwards.
- Treating inaccessible systems as obstruction without establishing the cause.
- Withholding the report from the committee on unstated grounds.