This saga of audit pe audit pe audit is a story of systematic fraudulent collusion between the bankers, the borrowers and the auditors, who have looted India.
Under the provisions of the Companies Act in India, every company appoints a statutory auditor, who is required to conduct an annual audit and thereafter certify whether its financial statements present a true and fair picture of its financial position and performance, as at the year-end. If the company management has prepared correct and complete books of account and if the auditors have done their job ethically and competently, then the balance sheet certified by them must show a correct picture of the financial position and the assets and liabilities of the company.
It does often, however, happen that the management of companies cook up their books of account and do not disclose the truth, such as to hoodwink the auditors too, in case they do not cooperate in this scammy practice. This has happened in numerous cases, including in cases of Vakrangee Ltd., DHFL, Manpasand Beverages etc. Auditors are thus presented with false books of account at times, but yet with their expertise and experience, they are expected to unearth the truth, which is not so difficult. With increased digitisation of records and databases, it is not difficult to unearth the truth, unless the auditors themselves are negligent, incompetent or collusive with the management.
Take the case of Manpasand Beverages, which showed bogus sales and profits to show a rosy picture. That could have been easily detected by the auditors by carefully verifying and matching the GST records and income tax records of the company. Or take the case of money siphoned away through shell entities in the case of DHFL, ILFS and India Bulls. That can also be easily known by verifying the actual ownership of these shell entities as per the MCA records.
The entire NPA crisis of India is ridden with bogus financial statements of the lenders and of the borrowers too. Banks hid their true financial position, which the auditors merrily certified, which explains why they went bankrupt and into PCA by the RBI and so did the borrowers hide their true position, all now requiring a reaudit of their financial statements.
The first thing that the new board of directors headed by Uday Kotak did, when they took charge of the affairs of ILFS was to appoint a new audit firm to find out the true financial position of the ILFS group. In most such cases of fraud and wilful default, the financial statements are bogus and thus a forensic auditor is appointed, in order to unearth the truth and detect the trail of funds siphoned away by the management, clearly indicating failure of the statutory auditors, to ensure that they correctly certify their financial statements.
Jet Airways according to us, is a classic case of this audit pe audit syndrome. Its financial statements audited by a Big Four CA firm, have been fraudulent for many years. Its fraud and utter bankruptcy were evident in February 2019 itself, with its financial statements being totally questionable. It’s lead banker SBI got a forensic audit of the airline conducted and the forensic audit report was received by SBI in March 2019.
The report had incriminating findings related to the non-recognition of liabilities, related party transactions, bogus expenses and gross siphoning of funds and yet the bankers led by an eager SBI, in their meeting held on 23.4.2019 treated the matter as closed, having shockingly found the responses of Jet Airways to be more than satisfactory. SFIO has summoned the banks to question as to how were the responses of Jet to the forensic audit report found to be adequate and what was the bankers hurry to treat the matter as closed.
Interestingly, after a statutory audit and a forensic audit, a second forensic audit has now been ordered of the same financial statements of Jet, that was earlier surprisingly certified to be true and fair. The glaring errors and frauds in the audited financial statements of Jet Airways are evident from the fact that the ED and SFIO in their ongoing investigations have found blatant and large scale siphoning of funds by Naresh Goyal, particularly through overseas related party entities and against declared liabilities of Rs.19000 crores in its latest audited balance sheet, the insolvency professional appointed by the NCLT has received claims of over Rs.36000 crores from lenders and creditors, indicating that losses and liabilities were hidden by the airline, to show a rosy picture.
This saga of audit pe audit pe audit is a story of systematic fraudulent collusion between the bankers, the borrowers and the auditors, who have looted India, such that the entire banking system of India has been derailed. And this multiple audit phenomena has made the balance sheets of the best of companies to be suspect, such that they are not trusted anymore and bankers are reluctant lenders today.