Exclusive | ICAI probe into IL&FS says EY, KPMG affiliates, Deloitte misrepresented facts

Deloitte Haskins & Sells LLC was the statutory auditor of IL&FS till FY2017, IFIN and Deloitte audited accounts from FY2016 to 2018, while in the same tenure, Deloitte audited accounts of ITNL from 2016 to 2018.

EY affiliate SRBC & Co. LLP was the statutory auditor for IL&FS for FY17-18 and for ITNL from FY2016-2018.

KPMG affiliates BSR & Associates LLP was the statutory auditor for IFIN from FY2016-2018 and in the same tenure, BSR audited accounts of ITNL from FY2016-2018.

In the case of IL&FS, statutory auditors did not conduct a proper examination. They did not check requisite approvals from competent authorities for managerial remuneration. Auditors even failed to report that the company did not meet the criteria for Core Investment Company as stipulated in the RBI Circular dated January 5, 2011.

In some cases, the consolidated financial statement of IL&FS for 2016-2017 demonstrates that there were various subsidiaries with negative net assets and those with substantial value of positive assets, which were loss-making entities or with negligible positive returns. While blindly relying on the Group Companies Statutory Auditors Report, the auditors failed to record special circumstances prevailing across the group companies did not conduct further examination.

The ICAI raised concerns regarding investments in indirect subsidiaries by IL&FS. Their report stated, “Statutory Auditors failed to make a note of the investments made by IL&FS in its various direct and indirect subsidiary/group companies whose net worth were negative. This demonstrated impairment in the said investments which the statutory auditor was duty bound to note/report as per the relevant accounting standard and/or failed to produce the crucial documents in support."

The ICAI found that statutory auditors failed to report about serious mismatches between assets and liabilities, which clearly indicated liquidity concerns on the balance sheet. They failed to note and report the exact sources and applications of cash flow, relative strength of the IL&FS group companies, which itself created doubt over long-term viability of the companies.

In the case of IL&FS Financial Services, which was one of the entities which defaulted in servicing its debt, statutory auditors had failed to apply the RBI directions and state the fact in its report.

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."

IFIN did not present an actual picture of bad loans in their books. As per the report, “The share of bad loans is much higher than that disclosed in the annual report and thus the provisioning requirement should have been much higher than what is reflected in the balance sheet. Further the provisions created against NPAs were also not adequate."

The ICAI report also stated that statutory auditors had failed to adhere to the RBI circular on ‘Disclosure in the Notes to Accounts to the Financial Statements – Divergence in Asset Classification and Provisioning’. There were huge debts outstanding on part of IFIN, pointing towards overleveraged position. There were increasing liabilities/loans and increasing borrowing costs which auditors completely failed to investigate.

The report mentioned that the statutory auditors “failed to identify and assess the risk of material misstatement whether due to fraud or error. Significant amount of IFIN seems to be routed through its subsidiary which shows diversion of funds, which were not provided in the statements made by statutory auditor”.

IFIN indulged in financial transactions with its own subsidiaries which were non-viable. However, the auditors failed to pinpoint this in their report. There were clear indications of high risk involved that questioned the very viability of IFIN, but it was completely ignored by the auditors.

ICAI findings showed that the auditors miserably failed to report data 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 flow.

In fact, to the contrary, the statutory auditors mentioned that in view of its positive net worth, positive cash flow, credit ratings and Boards' proposals, there was no doubt on the ability of the entity to continue. This is a clear misrepresentation of facts.

In the case of ITNL, from a perspective of related party transactions, parties to whom loans were given were mostly accruing losses. However, the strategy adopted by ITNL with regard to making investments was not changed. This resulted in profit-making companies turning into loss-making entities, which was not mentioned by the statutory auditors in their reports.

The ICAI report stated, “No procedures were implemented in order to verify whether the companies which were raising trade debt(s), loans and advances were in fact profit making entities and in a position to repay the amounts being raised and becoming due. The consolidated financial statement of ITNL for the Financial Year 2016-2017 demonstrates that there were various subsidiaries with negative net assets & those with substantial value of positive assets which were loss making entities or with negligible positive returns. While blindly relying on the Group Companies Statutory Auditors Report, the auditors failed to record special circumstances prevailing across ITNL’s group/subsidiary companies and failed to conduct a further examination on the said group companies”.

Moneycontrol has reached out to EY, Deloitte and KPMG for comment. This article will be updated when a response is provided.