Forensic Diligence: Going Beyond Audits to Mitigate Hidden Risks in Alternative Assets.

It was September 2018. India’s financial world was about to be rocked.

News broke that Infrastructure Leasing & Financial Services (IL&FS), a diverse giant with over 300 subsidiaries in roads, power, airports, and urban development, had defaulted on its debt. The number was jaw-dropping: ₹91,000 crores.

But what truly sent shockwaves through the system wasn’t just the default but the fact that Deloitte, IL&FS’s auditor for a decade, had signed off on clean reports year after year, right up until the collapse.

The scandal didn’t just raise eyebrows — it raised questions about the very credibility of India’s auditing profession.

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The IL&FS case was not about a single misstep; it was about systemic failure across multiple layers of governance.

Investigations later revealed that:

• IL&FS entities borrowed short-term to fund long-term projects, creating severe liquidity mismatches.

• Round-tripping of funds among subsidiaries helped conceal actual debt stress.

• Evergreening practices, using new loans to repay old ones, kept the illusion of solvency alive.

• Key management allegedly misled auditors and regulators through opaque disclosures.

In essence, IL&FS became a financial maze, where one arm supported another until the structure collapsed under its own weight. By 2025, around ₹45,281 crore has been resolved, with 197 out of 302 entities addressed under insolvency or restructuring.

This wasn’t merely a corporate failure — it was a wake-up call for investors in India’s alternative assets, where similar hidden risks can remain buried beneath polished financials.

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Traditional audits are designed to check compliance, not to detect deception.
Auditors rely on sampling, management representations, and accounting standards — all of which assume integrity and transparency. In most cases, this works. But when management itself manipulates the system, traditional audits often fall short.

That’s where forensic diligence comes in.
Forensic diligence goes beyond merely verifying documents, as a regular audit does, and deals with behaviour, following the money, and questioning the discrepancies involved. It is, effectively, the intersection of accounting, data analytics, and digital forensics designed to reveal manipulation that may or may not comply with accounting standards, but misrepresents the economic reality.

Here’s how the two approaches differ:

In the IL&FS case, a forensic lens could have detected early warning signals like:

• Unusual related-party transactions within subsidiaries.

• Round-tripping of funds to mask bad loans.

• Aggressive revenue recognition practices that inflated profitability.

• Signs of liquidity stress masked by internal borrowings.

Each of these patterns, if investigated early through a forensic review, could have triggered intervention long before thousands of crores were defrauded.

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Alternative asset classes are growing fast in India and globally. They attract investors with the promise of higher returns, longer horizons, and portfolio diversification.

But here’s the catch: alternative assets often involve unlisted companies, complex structures, and limited public disclosures. In other words, they’re opaque.
That makes them vulnerable to hidden risks, especially the kind of risks that slip under the radar of standard audits.

This is where forensic diligence becomes not just useful—but essential for mitigating hidden risk in alternative assets.

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The IL&FS crisis was a wake-up call not just for auditors, but for investors and fund managers.
It showed that relying purely on compliance-based assurance is no longer enough.

Forensic diligence must move from being a reactive “post-mortem” exercise to a proactive risk-mitigation strategy.

Imagine every AIF or private equity fund integrating forensic analytics into its investment process — tracing fund flows, analyzing vendor linkages, mapping related entities, and flagging governance anomalies in real time.
That would transform India’s alternative investment landscape from compliance-driven to credibility-driven.

An investor can apply the same forensic frame of thinking throughout the entire life cycle of the investment: 

• Pre-investment: Appraise the promoter's integrity, financial trail, and previous associations. 

• Post-investment: Monitor cash flow trails, payment anomalies, and governance behaviours.

• Exit stage: Confirm a clean transfer of the assets and any regulatory non-compliance. 

In this way, forensic due diligence helps investors make tactically sound, robust decisions in a rapidly changing market.

Conclusion

For investors navigating the intricate world of alternative investments in India, the lesson is simple: don’t just verify — investigate.

Audits ensure compliance.
Forensic diligence ensures confidence.

And in a financial landscape where alternative assets are becoming the next trillion-dollar opportunity, the ability to uncover hidden risks in alternative assets will define who thrives and who merely survives.

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