The charges against the auditors include criminal breach of trust as they helped the then top management of the firm to falsify the accounts and financial statements of the company. The SFIO chargesheet comes about two years after the ministry of corporate affairs ordered an investigation into the Reebok case in May 2012. After the Satyam case in 2009, this is the second major case where an arm of one of the big four audit firms has got involved in a brush with the law. In the Satyam case, the government agencies had named an arm of PricewaterhouseCoopers for abetting the accounting fraud.
The chargesheet has also included the companys statutory auditor, Delhi-based N Narasimhan & Co, for pervasive failure ... to detect material falsification of financial statements (and) weaknesses in control and consequent fraud perpetrated for years.
A spokesperson for BSR & Co denied the charges to The Indian Express. In response to an e-mail the firm said it was not the statutory auditors for the years 2008 to 2011 and accordingly, have no statutory reporting obligation in India. While BSR is an affiliate of KPMG India, in the case of Reebok, it was assigned the audit function of Indian subsidiaries of Adidas Group, including Reebok India by KPMG Germany. KPMG India declined to comment on the issue, while Narasimhan & Co, too, declined comment.
According to the chargesheet, a copy of which has been seen by The Indian Express, BSR has been criminally negligent as an auditor and criminally misled (among others) the public and shareholders, including Adidas AG, and other stakeholders. They have falsely issued clean audit opinions on the financial statements of Reebok India for the years 2008 to 2011.
Reebok Indias former MD Subhinder Singh Prem and chief operating officer Vishnu Bhagat were allegedly involved in a Rs 870-crore fraud. They apparently over-invoiced their channel partners to show higher sales to meet their annual targets. Without sending the goods to these franchisees they would bill them and instead store the goods in secret warehouses and reverse the sales later.
To finance the operations they also took loans from banks by using fake invoices and raised deposits from high net-worth individuals. The issues came to light when Adidas, which had bought Reebok International, inquired into their Indian operations in 2011. The forensic arm of KPMG India was hired by Adidas to investigate the suspected irregularities.
But the SFIO noted that even this forensic audit/ review was not adequately designed and supervised. In fact, the forensic audit should have been more in-depth, comprehensive and investigative in nature.... This again points to lack of professional skepticism and due care at an organisational level within KPMG, India and its affiliate auditing arm BSR.
In May 2012, Reebok Indias director (finance), Shahin Padath, had filed a complaint with the Gurgaon Police alleging the fraud.