IL&FS scam – Collusion at the highest levels

Two years after Infrastructure Leasing & Financial Services (IL&FS) collapsed, the Bombay High Court passed an order on 21 April 2020 dismissing the Union Government’s ban on the auditors of the company – Deloitte Haskins & Sells and BSR & Associates (a KPMG affiliate). The auditors had been charged with collaborating with the management of the company to conceal facts and fraudulently falsifying the books of accounts and financial statements from the financial years 2014-2018.

Deloitte and KPMG are counted among the biggest 4 global audit companies. They provide accounting, auditing and consultancy services to the largest companies across the world. As auditors, they are supposed to ensure that the books of accounts of companies are maintained according to the law of the land, and that the financial statements reflect the correct financial position of the company. However, these global audit companies have been involved in some of the biggest scams through collaborations with the directors of companies to present false accounts.

In the case of IL&FS, the directors of the company had committed several illegal acts like sanctioning huge amounts of money to companies they wanted to favour even when they knew that it was risky to lend to them. They diverted funds that they had borrowed for one purpose to another. The directors also paid themselves huge salaries of more than Rs.10 crores each annually, and additionally, “commissions”, performance related bonuses of several lakhs each, even as the company and its subsidiaries were actually sinking.

The biggest shareholders of IL&FS were public sector banks and institutions – 40% of the company was owned by LIC, Central Bank of India and SBI. Many bureaucrats and former bureaucrats were on the rolls of the company. This gave the company advantages in bagging multi-crore infrastructure projects and it grew to become one of the largest companies in the infrastructure sector – building of highways, bridges, construction of utilities, etc. So when the company defaulted on its loans in August 2018, it had a devastating impact on its lenders and investors. The Provident Funds and retirement funds of several companies to the tune of Rs.15000-20000 crores were invested in IL&FS, putting the retirement benefits of workers and pensioners at risk. The entire scam is valued at Rs.90000 crores.

The RBI had not taken any steps to stop IL&FS from borrowing more even when it was evident that the company was breaking rules concerning lending and borrowing. There were several so-called independent directors who are appointed to ensure the integrity of operations of the company. But they did not question the management.

The Ministry of Corporate Affairs (MCA) of the government of India is the office which has formulated the law to safeguard against corporate fraud and corruption. It is the authority to whom the auditors of a company report, certifying that the accounts and financial statements reflect the true and correct position. When the company went bankrupt, the MCA directed the Serious Fraud Investigative Office (SFIO) of the government of India to investigate into the affairs of the company. The SFIO submitted a report of 750 pages with more than 30,000 pages of annexure. The MCA’s case for banning the auditors was based on this report. The Mumbai High Court dismissed the case on the basis that report did not demonstrate even a single evidence of fraud. It dismissed the case against the auditors which if proved would have led to their ban in India. It pointed out many inadequacies and absence of a thorough and comprehensive investigation in a case which involved several group companies and third parties. The MCA which has formulated the Companies Act 2013, and is filled with experts in Company Law had even applied a wrong section of the Act to prove its charge of professional misconduct of the auditors. The Bombay High Court used this and other technical issues to dismiss the case of banning the auditors – it claimed that this section of the Companies Act cannot be used against auditors who have resigned!

It is clear that the MCA was not interested in banning the audit firms. The High Court found many holes in the investigative report but it did not call for a re-investigation into the case, when it was very obvious that the auditors had indeed colluded with the management in this huge fraud.

This is not the first time that auditors have colluded with the capitalists to defraud the people. Last year, just after the IL&FS scam came to light, the Securities Appellate Tribunal (SAT) gave a clean chit to Price Waterhouse (PW). The Securities and Exchange Board of India had imposed a 2-year ban on PW for fudging accounts in the Rs 7800 crore Satyam computer scam. International audit companies such as PricewaterhouseCoopers, KPMG, Ernst & Young and Deloitte & Touche were all involved in the global financial crisis of 2008 and were reported to have fudged accounts of large banks which collapsed during the crisis.

This is how the capitalist system works. It is based on the exploitation of wage labour and corruption at the highest levels between big corporations, biggest banks and lenders, the ministries and government departments which draw up the laws and rules that have to be complied with and the big audit companies who are paid to be watchdogs for compliance. On the other hand, the small businesses and enterprises are harassed and penalised for minor violations of laws and procedures. Frauds of thousands of crores of rupees are covered up to allow the biggest capitalists to continue expanding their wealth.

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