IL&FS scam: Audit firm noted lapses by IFIN but looked the other way

In emails to IFIN’s officials, the audit team noted 17 instances, including a loan of `12 crore extended to a subsidiary of Unitech, which was then used to repay interest on previous loans.

IL&FS scam: Audit firm noted lapses by IFIN but looked the other way
Their role will now be under the scanner as regulatory agencies look at the web of IL&FS transactions.

By Anwesha Ganguly

UPDATE: BSR & Associates’ response appended at the end of the story

The investigation by the Serious Fraud Investigation Office (SFIO) into the affairs of IL&FS Financial Services (IFIN), which is the basis on which the ministry of corporate affairs has filed a chargesheet in a Mumbai court against the company management, found that BSR & Associates, an affiliate of KPMG, which was IFIN’s auditor, had on May 2018 raised queries about at least 17 of the company’s loan facilities being used for evergreening but ultimately never highlighted it in their report.

As is known, the MCA has also moved the Mumbai bench of the National Company Law Tribunal seeking a five-year ban on BSR & Associates and Deloitte Haskin & Sells for failing to do their statutory duty as auditors. BSR & Associates along with Deloitte Haskin & Sells were auditors for IFIN in FY18 and in FY19 BSR was the sole auditor.

The audit firm’s (BSR & Associates) team raised queries on evergreening of loans extended to companies, including Unitech, Parsavnath Developers, Siva Group, Ansal Properties & Infrastructure, KVK Energy & Infrastructure in an email to the company’s management. The BSR team queried Ramesh Bawa, then CEO and managing director of IFIN, on RBI’s 2017 inspection report findings as well, sources said. Bawa told the auditor that all fresh loans were given against additional security and assured them that the flagged-off borrowers were “positive for recovery”.

Sampath Ganesh, partner at BSR Associates, justified the failure to report fraud by saying it was not explicitly stated in loan approval documents that the fresh loans were disbursed for repayment of old outstanding ones, sources said.

In emails to IFIN’s officials, the audit team noted 17 instances, including a loan of Rs 12 crore extended to a subsidiary of Unitech, which was then used to repay interest on previous loans. Similarly, the BSR team had noted that Ansal Properties made interest payment on previous loan facility from fresh loans amounting to Rs 10 crore given in the months of June, November and December 2017. In the case of Parsavnath, the audit team observed that fresh loans were later disbursed to service an account which became stressed in July 2015. In the case of ABG International as well, fresh and unsecuritied loans were given to the company to service previous loans.

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The SFIO had in its chargesheet said that IFIN management extended loans to group companies of defaulting borrowers to avoid non-performing asset classification. Fresh loans were used for repayment of old ones until the final loan facility was written off or went unrecognised.

Ganesh, in his statement to the SFIO, also blamed the absence of regulatory clarity from the Reserve Bank of India (RBI) for the audit firm’s inaction.

“Evergreening was under RBI’s consideration having identified some transactions in the RBI draft inspection report for the year ended March 31 2017, pending receipt of the final report even after about 5 to 8 months of issue of draft report resulting in the absence of regulatory clarity on what kind of transactions should be regarded as ‘evergreening’,” Sampath told SFIO, as per excerpts of the interim report seen by FE.

The RBI had pointed out IFIN’s flouting group exposure norms in 2015, even though it did not impose any penalties or take corrective action, SFIO’s probe found. The central bank only clarified its position on classification of group companies and IFIN’s negative net owned fund (NOF) and credit adequacy ratio in November 2017. Net owned fund is the aggregate of paid up equity capital and free reserves on company’s balance sheets. A registered NBFC, such as IFIN, is required to have a NOF of Rs 2 crore.

The SFIO report has recommended that RBI conduct internal investigations into why action was not taken at the right time to prevent ballooning of the matter.

BSR & Associates, KPMG’s affiliate in India, in response to FE’s queries said its audit of IFIN was done in accordance with the applicable auditing standards and legal framework. “We will defend our position in accordance with the law, and are confident that the judicial process will confirm BSR’s position,” the firm said in an email response.

UPDATE: BSR & Associates’ response:

Your June 19, 2019 report in the Financial Express titled “IL&FS scam: Audit firm noted lapses by IFIN but looked the other way” was grossly misleading and sadly sensational in the way it characterized our work. It is distressing to see an unsubstantiated and baseless headline from your reputed newspaper which suggests that we ‘looked the other way’, which is factually incorrect. Please allow us to explain and support this with the facts.

On behalf of BSR & Associates, I would like to state that we planned and conducted our statutory audit for IL&FS Financial Services (IFIN or the Company) for the year ended 31 March 2018. The year ended 31 March 2018, was the first year that we were appointed as auditors of IFIN and we carried out this audit jointly (as per the terms of our appointment) with the predecessor auditors of IFIN.

As is commonly understood and accepted in the financial services industry, the concept of ‘evergreening’ is a contentious and systemic issue, and hence a matter of constant dialogue between banks/NBFCs and the Reserve Bank of India (RBI). The issue of whether fresh loans have been availed by borrowing companies to repay existing loans only with a view to avoid a Non Performing Asset (NPA) classification is one that is ambiguous with regard to interpretation. Hence, it is very common to see divergent views on this aspect between a financial services company and the RBI. We wish to emphasize that when we signed-off our audit report for FY 2019, several of these classification issues were still under discussion between the RBI and IFIN.

As a part of our audit, we took into account the RBI inspection reports and the ongoing discussions between IFIN and the RBI. Further, we engaged in appropriate discussions to gather relevant facts from IFIN and also reviewed the letter sent by IFIN to the RBI on this matter. We also performed an independent analysis and procedures in respect of these transactions. Finally, in line with our responsibilities under the auditing standards, we highlighted such contentious matters to the Audit Committee of IFIN, which included several independent directors.

All of the above clearly demonstrate that no attempts were made whatsoever to avoid any reporting, but rather duties as an auditor were performed, in good faith. We are completely committed to the highest standards of audit quality and ethics.

Sound financial reporting and corporate governance are the collective responsibility of the management, internal auditors, Board members, regulators and the statutory auditors. It must also be borne in mind that a statutory audit is not a forensic investigation.

It is important to look at corporate failures such as IL&FS carefully to determine the root causes, and then affix responsibility. We stand ready to cooperate in this process.

We therefore request you to kindly print a clarification to the headline and the story, so that your readers are accurately informed.

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First published on: 19-06-2019 at 05:53 IST