The Indian startup ecosystem stands at a critical juncture as it aims for sustainable growth and global credibility. In just a few months, the curtain has been pulled back on enormous failures of corporate governance and financial misreporting across the sector. These challenges again trump the achievements of Indian startups. Instead of fixating on creating a large number of unicorns every year, India must prioritize building startups that can stand the test of time and last for 100 years. The abuses call into question the long-term sustainability and ethics of many of the nation’s most promising innovations.

Those first four months of 2025 haven’t been a cakewalk. The depredation that ensues when we hear about the latest examples of financial misreporting, revenue inflation and corporate governance failures… These problems have hurt the bottom line of private companies like AMC. They’re not only hurting their own startups, but the overall global perception of Indian startup founders and the whole ecosystem. Flagship ventures such as BYJU’S, BluSmart, Dunzo and Log9 have all recently come under the spotlight for similar issues, underscoring the industry-wide prevalence of these issues.

That’s why these events should be a wake-up call both for investors and regulators, but for startup founders. Tackling these issues is imperative for creating a vibrant, innovative startup ecosystem in India.

Startups Under Scrutiny

Is it any wonder that some of our most high-profile recent startups are suddenly under intense scrutiny for glaring governance gaps and lapses? BYJU’S was previously lauded as the largest and most successful edtech startup in the world. Now, it’s embroiled in a heavy legal dispute with its debtors, who blame the enterprise for transferring greater than $500 million to a fake shuttle home in the US. It was the company’s financial practices that drew the heaviest fire. The abrupt exit of its CFO, Ajay Goel—in only his sixth month on the job—during 2023 only fueled concerns about possible accounting fraud and financial reporting delays.

BluSmart, Dunzo, and Log9 as well, have been other high-profile ventures in the country that have come under the scanner for their corporate governance policies. While each case can vary in their specifics, at a base level all three share a common concern. The lack of transparency and accountability in these financial decisions and their reporting is dramatic. These cases are symptomatic of a larger trend, one that’s calling for stricter oversight and enforcement of ethical practices within the startup world.

Even those companies that seem most innovative and poised to grow quickly are not safe from these challenges. According to Inc42, Josh, a short video platform under VerSe Innovation, falsely boosted its paid influencers campaign by adding fake bots as followers. This is a tactic they used to demonstrate user traction. These practices harm the integrity of the Twitter platform and cast doubt on the authenticity of Twitter’s purported user base.

The Impact of Financial Frauds

These financial frauds and governance lapses have a ripple effect on the Indian startup ecosystem. Ashneer Grover’s removal as BharatPe MD is a notable watershed. The two-year legal battle that ensued serves to underscore the implications that can result from these types of controversies. The case irreparably damaged BharatPe’s reputation. Beyond these immediate effects, it opened up broader questions around the accountability of fast-growing startup founders and executives.

In early 2023, GoMechanic acknowledged having defrauded investors by overstating revenues. This shocking disclosure was yet another blow to investor sentiment and put the brakes on large-scale fundraising in the Indian startup community. These occurrences destroy confidence and render financiers more wary to deploying cash in Indian new ventures.

These cumulative effects are clear when looking at funding data for Indian startups. According to media reports, Indian startups raised $3.1 billion just in the first quarter of 2025. This reliable number is indicative of an investor class that’s playing it safe amidst increasing alarm over governance and financial accountability.

Strengthening Corporate Governance

Tackling the increasing challenges of corporate governance and financial misreporting will require a multi-pronged approach, with roles for startups, investors, regulators, and auditors. For startups it means more than anything else that they should start from day one by developing a deep ethos of ethical conduct, transparency and accountability. This means developing strong internal controls, adopting good accounting practices, and creating a culture of compliance.

"What emerges is a loop — an erring management pressurising the sales team to drive business and pushing the finance team to show growth at any cost (as promised to investors), no matter if it calls for sidestepping controls, inflating revenues, making fake invoices and even money laundering."

Pramod, a veteran smart city consultant, drove home the point that accounting needs to be baked into a company’s structure from day one.

"Basically accounting isn't just one more checkbox that any company is eager to tick, rather it should be ingrained into the operations from the very beginning itself." - Pramod.

We can’t forget good governance. Investors are critical partners in the promotion of good governance. Before investing in these startups, they need to do some serious due diligence. It’s more important than ever to carefully scrutinize the company’s financial policies, internal controls, and code of ethics.

"VCs must take note of these three aspects before making the final move towards investment,"

Siddarth Pai, founding partner and CFO of 3one4 Capital, believes that the current slowdown is exposing bad actors in the system. This reinforces the fact that investors need to stay focused and forward-looking in rooting out and remedying governance problems before they become scandals.

"First, check if the founder is hesitating in providing information. Second, try to assess if there’s undue pressure to close financing without honouring data requests. And, third, note if the management is gatekeeping information or refusing to allow third parties to speak to customers or the junior management.” - Pramod.

Auditors, regardless of their organizational affiliations, are central to the transparency and integrity of our financial reporting. They have to pay greater attention to the financials of startups and evaluate them on their own merits. If they see potential red flags, they need to be prepared to push back on management.

The Role of Auditors and Regulators

As Sahen Karamchandani of Wealthtech India pointed out, even the best auditors have a history of not being able to catch such manipulations.

"It is a misconception that auditors report to the founder alone. They are in fact answerable to shareholders as well." - Pramod of Kayess.

Regulatory authorities such as SEBI and the RBI need to up their regulation over the booming startup ecosystem. First, they must act resolutely through enforcement actions against companies that purposely misreport their financial statements and other illegal and immoral acts. And still, while these bodies have begun to ramp up the scope or rigor of their investigations, Karamchandani contends enforcement actions are still lacking.

"Even reputable auditors like the Big Four – the group of Deloitte, PwC, EY, and KPMG – have failed to highlight these manipulations time and again. It commonly goes unnoticed or is revealed only after a significant delay." - Sahen Karamchandani of Wealthtech India.

Pramod notes that the ICAI is crackdowns on auditors like never before. This added scrutiny leads to greater control and places big accounting firms on higher alert for breaching rules.

"Regulatory bodies like SEBI and the RBI are starting to intensify their investigations, yet enforcement measures remain insufficient. Without the establishment of stronger governance, thorough audits, and independent review in the startup ecosystem, the relentless push to achieve unrealistic growth stories will persist in fostering unethical accounting behaviours, even under the scrutiny of leading auditors." - Sahen Karamchandani of Wealthtech India.

This is where third-party audits can be immensely powerful, as they have the potential to uncover if a project’s founder or management team is intentionally obscuring or diluting information. This highlights the importance of complete due diligence across the startup ecosystem.

"There is fear within the auditor circles on the notices now being issued by the ICAI when it comes to lapses. Hence, there are tighter controls in place and large accounting firms would not want to be on the bad side of a statutory body." - Pramod.

This is because startups are under extreme pressure to prove profitability and runaway growth prior to an IPO. This intense pressure can lead them to stretch the truth through creative accounting practices. Pramod noted that IPO-bound founder and management pressure is often cyclical. This kitestring of pressure forces them to show previous signs of profitability before hitting the public markets.

"We often see cases of accounting frauds and misreporting of financial figures. Will a disclaimer from the auditor do systemic cleaning? The answer is no." - Pramod.

IPO Pressures and Creative Accounting

He mentioned that he knows of at least four IPO-bound startups whose financials are delayed because auditors are refusing to sign off on their books after discovering discrepancies in their annual filings.

"There's an unbridled pressure on IPO-bound startup founders and management to show profitability for floating their public issues. At times, they also resort to creative accounts dressing to clear the exit of long-term investors before the draft papers are filed for the IPO." - Pramod.

These shocking revelations increasingly demonstrate the need for more scrutiny of startups seeking to conduct an IPO. It’s time for regulators to act to hold these companies accountable and prevent the use of deplorable accounting practices.

"I can name at least four IPO-bound startups whose financials are delayed because the auditors are refusing to sign on their books, after discrepancies were found in their annual filings." - Sathya Pramod.

These revelations highlight the need for greater scrutiny of startups seeking to go public and for regulators to ensure that they are not engaging in any unethical accounting practices.