The plot thickens around top-notch audit firm Deloitte and its once-prized client IFIN, the company at the centre of the ILFS fiasco.Deloitte, according to the Serious Fraud Investigation Office (SFIO), had disregarded the Reserve Bank of Indias regulations, turned a blind eye to IFINs evergreening of loans, and never cross-checked any of the tutored end-use certificates the company used to mislead lenders.The allegations based on emails, depositions, fund-flow information and interrogations of persons linked to IFIN are part of the agencys investigation report, sources told ET.IGNORING NORMSIn his statement recorded on oath, Rakesh Jain, senior manager at Deloitte, told SFIO that the RBI circular was never referred to him or any of his team members by seniors and partners of Deloitte.
The RBI master circular restricts a non-banking financial company (such as IFIN) from taking bank loans to fund activities like inter-corporate deposits and lending to subsidiaries.
I am not aware of the circular referred above The compliance to said RBI master circular was not part of audit plan, said Jain.Since bank term sheets or loan agreements take into account the conditions imposed by RBI, auditors, according to SFIO, are required to cross-check whether a company has used bank borrowings to fund restricted businesses.Deloitte was the sole auditor of IFIN for about a decade till 2016-17.
In 2017-18, the company was jointly audited by Deloitte and BSR, an affiliate of another Big 4 firm KPMG.Loan EvergreeningA Deloitte spokesman declined to comment on the allegations and findings as the firm has not been served the chargesheet by SFIO.While scanning records in the course of the investigation, the SFIO team found a document in the email server of ILFS prepared by the Deloitte engagement team, identifying the funding of borrowers for paying principal and interest.
It forms the basis of the SFIO allegation that Deloitte was aware of IFINs loan evergreening a ploy to mask defaults and losses by giving new loans to delinquent borrowers for servicing old borrowings.
Deloitte, said the agency report, was aware of the modus operandi of funding the defaulting borrowers for payment of interest and principal in a fraudulent manner by the management again and again to window dress the asset book of the company for several years.When asked about the email, Deloitte partner Udayan Sen denied knowledge of the document, saying that it was an interim work paper and not to be relied upon.
However, the report observes, that Sen had not stated about the manner in which doubts raised over the lending accounts of IFIN were dispelled before issuing an unqualified opinion on the financial statements.Rakesh Jain in his statement to SFIO admitted that over the years or in a particular year (based on sample-based audit) there were a few borrower groups such as SKIL, Flemingo, Varun, Parsvnath, KVK, Adhunik, lnd Bharat, Unitech, Kohinoor, HDIL, DB realty etc in which the above mentioned self-funding of interest was observed.
These observations were discussed with seniors and partners in Deloitte and subsequently the same was discussed by them with the management of IFIN (sic).
The IFIN management, in turn, defended its stand by telling the auditor that the new loans given to the same group were extended to different companies in accordance with the credit policy of IFIN and was within the NBFC prudential framework.TUTORED CERTIFICATES WHISTLEBLOWERSSince 2009-10, IFIN obtained tutored enduse certificates from chartered accountants AP Shah Associates to present a deceptive picture to lending banks.When questioned by the agency, Alay P Shah, partner of the CA firm, said, The certificates were sent on email and based on their assurance, I used to certify the same Since the company was a reputed one and they had reputed auditors where we used to see the audited balance sheet on year-to-year basis, we had no question of doubting the integrity of the documents and so the certification was given on good faith with the assurance that the documents would be available whenever required (sic).Many of these sharp practices authorised by Ramesh Bawa, the then CEO of IFIN, were pointed out in two whistleblower letters to RBI, the IFIN audit committee and auditors, among others.
While the IFIN board had taken cognisance of the letters and appointed CA firm Khandelwal Jain Associates to report on the issues, the scope was to verify whether procedural issues of giving loans as laid down in the policies were followed or not.
It is noteworthy that the review did not focus on lending to the borrowers again and again for repayment etc, said the SFIO report.Bawa was part of the group led by Ravi Parthasarathy, ex-chairman of IFIN.
Emails scanned by SFIO reveal that the group concealed adverse information relating to the performance of IFIN and how they misused their positions.
SFIO has given a clean chit to credit rating agencies as they were relying on audited reports.