It looks like heads have finally begun to roll in the real sense in the IL&FS scam, the Rs 91,000-crore fraud that caught India unawares a few months ago the after-affects of which are still being felt in many spheres.
Serious auditory irregularities in IL&FS accounts have prompted the Ministry of Corporate Affairs to set sleuths on the trail of Deloitte.
Last week, former CEO of Deloitte was put to a grilling question session by the Serious Fraud Investigation Office (SFIO) on the alleged misconducts and misdemeanors in the IL&FS scam .
The investigation was put on fast track after a whistleblower recently sent a letter to the SFIO. According to reports by new agency IANS, a lengthy India ban — as much as 5 years — now stares at Deloitte, one of the much-vaunted Big 4.
If that happens, it will be the second such ban after that of Price Waterhouse, which was debarred in India over the Satyam scam.
IL&FS scam revisited
The Infrastructure Leasing & Finance Services is the holding company of the IL&FS Group, with operations domiciled in separate companies which form an ecosystem of expertise across businesses like infrastructure, finance and social and environmental services. IL&FS was founded in 1987 with equity from Central Bank of India, Unit Trust of India and Housing Development Finance Co to fund infra projects at a time when its peers were focused more on corporate projects.
The mess came to light after IL&FS Financial Services — a group company — defaulted on servicing bank loans (including interest), term and short-term deposits. It also failed to meet the commercial paper redemption obligations due in mid-September last year. On September 15, the company reported that it had received notices for delays and defaults in servicing some of the inter corporate deposits accepted by it. Consequent to defaults, rating agency ICRA downgraded the ratings of its short-term and long-term borrowing programmes.
The defaults put a huge number of investors, banks and mutual funds associated with IL&FS in danger, sparking panic among equity investors.
The whistleblower letter
Senior Deloitte functionaries exactly knew what was happening inside the group led by Ravi Parthasarthy, the report said citing the whistleblower’s communique. Deloitte — IL&FS’ auditor for over a decade — benefited immensely from this collusion by way of exorbitant fees and huge contracts, said the letter.
The highly complex structure of IL&FS, which left investigators astonished, was in part Deloitte’s doing as this labyrinthine structure was based on its recommendations, the letter said.
At the time of the unravelling, the extremely opaque architecture of IL&FS had 347 subsidiaries, most of them overseas.
“The Parthasarthy-led closed user group, which ran like a secret society controlled the company’s narrative for 30 years in a completely unprofessional and opaque manner. Deloitte was part of this cosy club arrangement benefiting immensely,” IANS cited the whistleblower’s letter as saying.
The modus operandi
The letter made several explosive allegations as to how Deloitte was kept protected by the Parthasarathy clique. The IANS report lists them as such:
— Whenever there were dubious findings in course of the audit engagement, Deloitte agreed to rely on management explanations and comfort letters by compromising on its independent opinion.
— In cases where there were audit positions to be taken which were not in a favourable light for the group, the top management would meet and coerce the Deloitte partners for a more favourable position or a watered down position.
— Internally, several views in the matters of audit opinion were watered down by the Deloitte leadership in the first instance. Over the years, this has led the entire audit susceptible to legacy position and compounded the financial misreporting.
— In many cases, the language of the management response was agreed before hand by Deloitte to close its internal views.
— Financially the Group provided additional fees as consultancy services for mutual benefit.
Reports say the government is now looking to invoke the dreaded Section 140(5) of the Companies Act in the matter. The operative part of the law stipulates that — “Without prejudice to any action under the provisions of this Act or any other law for the time being in force, the Tribunal either suo motu or on an application made to it by the Central Government or by any person concerned, if it is satisfied that the auditor of a company has, whether directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers, it may, by order, direct the company to change its auditors.”
In the event of such a ban, Deloitte will join the ignominious league of Price Waterhouse (PW) which Sebi debarred from auditing listed companies and market intermediaries for two years in the Satyam fraud.