I had earlier blogged about how Indian investors should believe audited statements at their own peril.
Now, here is another startling case of how auditors colluded with promoters to commit fraud
A fortnight ago, chatting with bankers at Chennai’s Haddows Club, Farouk Irani, a pioneer in India’s leasing business, admitted that the company he led for decades along with industrialist friend AC Muthiah, has a hole of Rs 1,000-crore in its balance sheet.
Assets worth only Rs 200 crore has been created by First Leasing Company of India, where Irani has been the managing director since 1973, out of bankfinance of more than Rs 1,200 crore.
When the team of financiers led by a senior official of State Bank of India asked Irani where the remaining funds were deployed, he could not give any ‘satisfactory reply”. Stunned bankers told the company to close accounts with all banks outside the consortium, a source familiar with the development told ET.
The person also said that there were question marks on the audited financials of First Leasing, a Chennai-based listed company. The meeting with bankers took place a few days after the Reserve Bank of India barred the company from doing any business until further orders. “We confirm an RBI audit is under way of our accounts and until the audit is complete we cannot presuppose what the numbers are,” said Irani, responding to ET’s email query. When told that there are suspicions that funds have been diverted by the company’s management to unrelated activities, Irani said, “There has been no diversion of funds. Once the RBI audit is over it will reconfirm money was not diverted for any improper purpose.
Funds have only been committed for the benefit of the company’s stakeholders which would include payment of interest to the banks, the income tax, sales tax, salaries to the staff etc.”
Sarathy & Balu was the company’s statutory auditor for the financial year 2012-13 while MK Dandeker & Co was the internal auditor. NR Sridharan, partner at Sarathy & Balu, could not be contacted despite repeated attempts.
The company has been asked by its bankers to immediately open an escrow account with SBI and, collect and submit post dated cheques given to customers to SBI for credit, besides furnishing a list of receivables and assets.
According to banking circles, the company’s troubles started during the 1980s when Mercantile Credit Corporation, a group company of MAC, founded by Muthiah’s father late MA Chidambaram, ran into trouble. (Muthiah is the chairmanemeritus of Southern Petrochemical Industries)
In 1988, First Leasing had to pay out Rs 170 crore to depositors, borrowing money at a higher rate, when MAC faced financial difficulties. The tight money condition of the 1990s worsened things and later Rs 65 crore was lost in “misguided transactions” (but this amount was recovered after a period of time). The payment of Rs 170 crore, however, was never reported to banks.
The CEO of another south-based financial services group told ET that First Leasing also lost out as it failed to change with time and bring in new financial investors like private equity houses. More recently, it has been borrowing from banks to repay dues. The members of banking consortium include SBI, IDBI,UCO, State Bank of Travancore, Syndicate, Vijaya, State bank of Patiala, ICICI, IndusInd, Axis, Bank of Maharashtra, State Bank of Mysore, HDFC, and Catholic Syrian. The combined credit limit extended by them is.`1,322 crore and the present standing is Rs 1,211 crores-from ET
So basically, the books were cooked since the 1980’s !!Also, find it amusing that veterans felt that the solution to the hole in the accounts was to bring in private equity investors !!