If the auditors of PMC Bank have been a relatively unknown CA firm called Lakdawala & Co., those of ILFS were multinational giants like KPMG and Deloitte.
As more and more frauds and failures, whether of corporates, banks or NBFCs come out in the open, and so do shocking cases of wilful defaults by well-known borrowers, it is evident that the most common crime in them all was lying to cheat. Take the recent case of the collapse of the PMC Coop Bank, which has seen the arrests of the bank chairman and MD and the promoters of HDIL so far, and hopefully, we will see the arrest of its auditors soon, all that was done was to lie to falsify its financial statements and hide the truth. So they recorded loans under dummy entities, showed HDIL loans as given against deposits so that they appear to be safe and secured, hid the loans given to HDIL and did not classify it as an NPA, while the auditors quietly certified it all.
Take the huge ILFS fraud, ridden with bogus loans, false financial statements, round-tripping, fraudulent accounting and many such crimes all hidden with the active support and involvement of its auditors. Or take the fudged accounts of ICICI Bank under Chanda Kochhar or those of Axis Bank under Shikha Sharma, all to hide the dirty reality of bad loans and losses incurred. Or take the case of the fraudulent financial statements of Manpasad Beverages loaded with bogus sales, bogus profits, tax evasions and money laundering, which has resulted in the resignations of its auditors one after the other so far. All of them have indulged in blatant lying in order to hide the scammy reality and to show a rosy picture.
Lying is thus done by fudging and manipulating financial statements and it is not restricted to a particular segment of the society or the economy. Greed and crime, after all, have no caste, creed, race or colour. Thus if in the case of the PMC Coop. Bank, its directors are relatively unknown persons, that was not so in the case of ILFS, whose directors have been the top-ranking and well-known persons, including the likes of R. C. Bhargava, S B Mathur, Michael Pinto, Jerry Rao etc. And then if the auditors of PMC Bank have been a relatively unknown CA firm called Lakdawala & Co., those of ILFS were multinational giants like KPMG and Deloitte. Thus not only did the promoters of entities lie but so did those who were meant to keep a check on them ie. the independent directors, auditors and rating agencies.
The unfortunate reality is that such tampering of figures is not restricted to the private sector only. In recent years, the government has been accused of doing so on many occasions. The CAG had reported how the government manipulates and claims that it has met its target of fiscal deficit. It does so resorting to borrowing and spending by other entities like FCI, Railways etc., it does not pay vendors and it delays refunds, such that if the government claims that fiscal deficit was 3.46% of GDP last year, the reality is that it was actually 5.85%.
Similarly, Arvind Subramanian, the former CEA says that while the government claims our GDP growth rate to be about 6.5%, in reality, it was around 3.5%-4% and similarly the tax departments are known to meet their annual tax collection targets by delaying refunds and by compelling big tax payers to pay excess taxes. So is the case when the government claims that ease of doing business in India has considerably improved, by referring to the World Bank rankings while the ground realities are otherwise.
This rampant lying and collusion all around the economy have resulted in severe erosion of trust, such that the Mint reports that bankers do not trust corporate borrowers and NBFCs beyond a few names. They are thus unwilling to lend and have parked over Rs. 2 lakhs crore of funds with the RBI, preferring safety, even if that means a paltry return/income for them. This distrust is so high that between April-September this year, net of repayments by borrowers, there has been negative lending by banks in India. Lack of trust has broken the entire funding chain and has contributed to the liquidity crisis and slowdown in our economic growth rate.
Due to such distrust investors now do not trust bank balance sheets or ratings by rating agencies, individuals do not lend money to corporates and prefer the safety of bank deposits, stakeholders do not trust auditors, banks do not trust corporates and other borrowers and the RBI, in turn, does not trust banks. And till such trust which is inherent to transacting in an economy is not restored, the spunk in India’s lending and economy will certainly not be restored. As if an economic slowdown was not enough, the larger crisis that we face today is of the breakdown of trust.