IL&FS Scam: Auditors Fudged Accounts; MCA Seeks Reopening of Past 5 Years Financial Records

Moneylife Digital Team 26 December 2018

Economy & Nation

The Institute of Chartered Accountants of India (ICAI), in its interim report has said statutory auditors of Infrastructure Leasing & Financial Services Ltd (IL&FS) acted in a 'negligent and fraudulent manner' and prepared incorrect financial statements of the debt-laden group. Deloitte Haskins & Sells LLP, SRBC & Co. LLP, an affiliate of Ernst & Young (EY) and BSR & Associates LLP were auditors of IL&FS and its two main subsidiaries. According to reports, the newly constituted National Financial Reporting Authority (NFRA) may be assigned auditing of past five years’ books of accounts of IL&FS.

Last week, the ministry of corporate affairs (MCA) submitted the report from ICAI to the National Company Law Tribunal (NCLT). While submitting the report, the MCA sought reopening of past five years financial records of IL&FS and its units IL&FS Financial Services Ltd (IFIN) and IL&FS Transportation Networks Ltd (ITNL).

Moneycontrol.com, which has reviewed a copy of the ICAI report, says, "The ICAI, in their report, stated that the world’s premier auditors — Deloitte Haskins & Sells LLC, EY affiliate SRBC & Co. LLP and KPMG affiliate BSR & Associates LLP — were negligent and overlooked the actual situation at IL&FS, IFIN and ITNL."

According to the MCA’s application, the auditors understated bad loans and did not point out the inadequate provisioning made against such loans, violating norms set by Reserve Bank of India (RBI).

No reasons were given for increasing the liabilities or loans and the borrowing costs of the financial services subsidiary, leading to non-disclosure of the consequential impact of insufficient provisioning for debts, the report says.

As per the ICAI report the RBI had observed that the net owned funds (NOF) of IFIN had turned negative and it was over leveraged in its annual inspection report for FY 2014-15 and similar observations were made subsequently as well.

In a report, New Indian Express, says, the central government is planning to assign NFRA the task of auditing last five years’ books of accounts of the fraud-hit group. Quoting an official from MCA, the report says, "ICAI has done its primary investigation and the ministry had already placed its request to reopen the books of accounts of the IL&FS. While the process of appointing an independent professional for the purpose is on, the general consensus is that the task should be done under the aegis of NFRA.”

Here are some key findings of the ICAI interim report, which alleged...

That IL&FS did not meet RBI’s regulatory framework for core investment companies.
Whether the required approvals were being taken to provide high managerial remuneration.
Direct and indirect investments made by the parent IL&FS in its group subsidiaries.
The “serious mismatch” between assets and liabilities which indicated liquidity concern on the lender’s balance sheet.
Key balance sheet indicators of the beleaguered financier, such as its over-reliance on short-terms borrowings for financing its long-term assets, adverse key financial ratios and deterioration in the value of the assets used to generate cash flows.

“In fact the SA (statutory auditors) have mentioned that in view of its (IL&FS) positive net worth, positive cash flows, credit ratings and boards proposals, there is no doubt on the ability of the entity to continues as a going concern,” the report noted.

Deloitte Haskins & Sells was statutory auditor of IL&FS till FY2017, of IFIN from FY2016 to 2018. EY affiliate SRBC & Co was statutory auditor of IL&FS for FY17-18 and for ITNL from FY2016-2018. KPMG affiliates BSR & Associates was statutory auditor for IFIN from FY2016-2018. BSR also audited accounts of ITNL from FY2016-2018.

The NCLT will hear the case next on 1 January 2019.

Comments

User

Calm Waters

8 years ago

Ndl.Narendra Damodar5 days ago ICAI says they are educational charitable organization eligible for income tax exemption. Then how they can claim to be regulators of CA auditors. It is non sense. What they said thus in Supreme Court and what thay actually done here does not match. They should first decide what thay are. Such mockery by ICAI should be stopped. If they are charitable educational body let them mind that business. We should strengthen NFRA and SFIO for getting relief from fraud CA community. REPLY

Ndl.Narendra Damodar5 days ago ICAI says they are educational charitable organization eligible for income tax exemption. Then how they can claim to be regulators of CA auditors. It is non sense. What they said thus in Supreme Court and what thay actually done here does not match. They should first decide what thay are. Such mockery by ICAI should be stopped. If they are charitable educational body let them mind that business. We should strengthen NFRA and SFIO for getting relief from fraud CA community".

REPLY
As far as Mr.Damodar's comment goes there should be documentary evidence that the Hon'ble court has been misled by submitting facts or evidence that is not what is conveyed to members of ICAI.
Submit or quote reliable evidence to prove that voluntary educational institutions are not exempt from Itax. The AG or his associates representing the govt. should bring this to the notice of the court

Ndl.Narendra Damodar

8 years ago

ICAI says they are educational charitable organization eligible for income tax exemption. Then how they can claim to be regulators of CA auditors. It is non sense. What they said thus in Supreme Court and what thay actually done here does not match. They should first decide what thay are. Such mockery by ICAI should be stopped. If they are charitable educational body let them mind that business. We should strengthen NFRA and SFIO for getting relief from fraud CA community.

Peruvemba Subramanian Ramachandran

8 years ago

Immediately cancel the licence of all these audit firms; and bar the Chartered Accountant who signed the accounts for life; and seize all his properties to the Government.

Peruvemba Subramanian Ramachandran

Replied to Peruvemba Subramanian Ramachandran comment 8 years ago

Like the Arther Anderson , the then world No.1 audit and consultancy firm, was disbanded in 1997-8, from practising in any part of the world.

Jubtester

Replied to Peruvemba Subramanian Ramachandran comment 7 years ago

Appreciate Moneylife bringing some semblence of sanity to investors minds by their recent exposures. At least some one has their heart and head in the right place. All these audit firms are offshoots of similar narratives. Greed is the only motto they serve & subscribe to . Ravi parthasarathy (ILFS)offered them plenty of fodder to mulch. We have seen this time and again. As history goes western world is beset by much larger issues of fraud & skulduggery by these audit firms - who go scot free by making plea deals. Hope we do better than plea deals , while bringing them to book