Debt trap: ICAI reports slams IL&FS statutory auditors

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Published: January 5, 2019 2:37:49 AM

The NCLT has directed the MCA to begin the process of appointing different auditors for reopening the accounts of IL&FS.

The statutory auditors failed to make a note of the investments made by IL&FS, the parent firm, into its various direct and indirect subsidiaries and group companies whose net worth was negative.

A preliminary report of the Institute of Chartered Accountants of India (ICAI) has said that the statutory auditors of IL&FS did not carry out their functions in a proper manner, highlighting a number of negligences on their part.

Being a regulatory body of auditors, the ICAI’s preliminary findings were submitted to the ministry of corporate affairs which presented it before the Mumbai bench of National Company Law Tribunal (NCLT).

According to the ICAI report, a copy of which is with FE, the auditors did not conduct a proper examination whether IL&FS complied with the requirements with respect to the managerial remuneration paid to its ousted board of directors as well as a range of other issues.

The report said the auditors did not examine whether the erstwhile top brass of IL&FS were eligible to draw high salaries given the weak financial performance of the company.
The auditors also did not check whether the company had taken approval of the concerned authorities to be able to disburse these salaries.

FE had reported in its December 5 edition that while IL&FS swung from a small `142 crore profit in FY17 to a loss of `1,887 crore in FY18, thanks to the largesse of former LIC chairman, who headed IL&FS’ remuneration committee, the company’s top three employees, Ravi Parthasarathy, Hari Sankaran and Arun K Saha earned a combined `35.2 crore in FY18, a 33% hike over FY17.

As a proportion of FY17 profits, the three got 18.7%.

Other instances of negligence include failure to report that IL&FS did not meet the criteria for core investment company according to the guidelines stipulated by the Reserve Bank of India (RBI).

The statutory auditors failed to make a note of the investments made by IL&FS, the parent firm, into its various direct and indirect subsidiaries and group companies whose net worth was negative.

They also failed to give reasons for non-consolidation of loss making associate companies in the consolidated financial statements of the parent firm.

In a strongly worded statement, the ICAI report further said the statutory auditors “miserably failed to report from the balance sheet, data indicators which shows excessive reliance on short-term borrowings for financing long-term assets; adverse key financial ratios, and significant deterioration in the value of assets used to generate cash flows”.

On the contrary, the statutory auditors wrote that in view of its positive net worth, positive cash flow, credit ratings and the board’s proposals, there was no doubt of the ability to continue as a going concern. On January 1, the NCLT did not fix any blame on the auditors as the ICAI is still to complete its final enquiry into the matter and submit its report.

The counsel for the auditors had argued the accounts are actually prepared by the company while the role of the auditors is limited to auditing these accounts.

The counsel conceded that ICAI’s preliminary report, while finding instances of negligence, has not levelled a charge of fraud, as was being previously alleged by the MCA.

Over the past five years, the accounts of IL&FS and its two subsidiaries, IL&FS Financial Services and IL&FS Transportation Networks Limited (ITNL), have been audited by Deloitte Haskins & Sells, EY affiliate SRBC & Co, and KPMG affiliates BSR & Associates.

The NCLT has directed the MCA to begin the process of appointing different auditors for reopening the accounts of IL&FS.

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