IL&FS Scandal and the Role of Auditors

The accounts of every company are, by law, required to be audited every year. The audit is supposed to detect any illegal activities and ensure that the profit or loss shown in company accounts is a true reflection of the reality. If the management of a company manipulates the accounts to hide losses, or to show inflated profit numbers, the auditor is supposed to detect all such fraudulent activities, write it down and submit their audit report to the share-holders of the company.

It has come to light that the auditors of Infrastructure Leasing and Financial Services (IL&FS) group of companies did not fulfil this duty. On the contrary, the auditor helped the senior management to freely carry out all kinds of swindling and looting activities.

Deloitte Haskins & Sells and two other auditing firms affiliated with KPMG and Ernst & Young were among the auditors of the three companies of the IL&FS group during the period 2016-18. These are all known as leading international auditing firms. They have their headquarters in the United States of America. None of them reported on the fact that IL&FS had fudged its accounts to understate bad loans resulting from its speculative activities in violation of the norms set by the Reserve Bank of India.

An anonymous letter by a member of the senior management team at Deloitte to the Government of India has revealed that Deloitte was fully aware of all the irregularities. Deloitte was paid Rs. 20 crore per year as it’s auditing and consulting fees. In return, Deloitte has colluded with the IL&FS management and helped to fudge the company’s accounts, year after year. A senior tax advisor was engaged by Deloitte to design a complex system for IL&FS to evade taxes.

This is not the first time when a reputed auditing firm has been shown to have helped a capitalist company to manipulate its accounts. In January 2009, auditors Price-waterhouse Coopers (PwC) were found guilty of helping capitalist B Ramalinga Raju in manipulating the accounts of Satyam Computer Services, to show excess income of over Rs 14,000 crore.

The auditing business is dominated by four multinational monopoly companies, which are referred to as the ‘Big Four’ – namely, Ernst & Young, Deloitte, KPMG and PwC. Their dominance is so high that the market value of all the companies they audit is more than two-thirds of the total value of all companies registered on the Indian stock market. They are so big that the regulatory bodies set up by the Government of India hesitate to take any action against them. Thus, for instance, the Securities & Exchange Board of India (SEBI) took nine years to complete investigations and penalise PwC for its role in the case of Satyam Computer.

Indian big capitalists are warning the government against banning any of these audit companies, arguing that it would have a negative impact on foreign investment because multi-national companies prefer to engage one of the Big Four as their auditors. These Big Four are best trained to advise capitalist companies on how to minimise taxes and maximise profit.

When the maximisation of private profit is the primary driver of a system, the temptation to cheat and carry out frauds cannot be resisted by capitalists. Most frauds carried out by capitalist companies go undetected. If and when any fraud comes to light, the blame is put on a few individuals. The truth is that the entire capitalist orientation of the economy is to blame.

The only way to stop the loot of public funds and people’s savings by giant-sized financial companies is to reorient the economy towards fulfilling people’s needs, instead of being oriented to fulfill capitalist greed. All financial institutions would then work to fulfil social needs and not be a tool in the hands of monopoly capitalists to reap maximum profits by defrauding and looting the public.

Highlights of the IL&FS Scam

IL&FS created a web of 347 subsidiary companies, most of which are based overseas to hide its fraud.

It indulged in:

-   manipulation of accounts,

-   tax evasion,

-   money laundering,

-   deliberately giving bad loans,

-   loans to defaulters,

-   lending at a loss,

-   loans without securities, and

-   huge siphoning of funds by the directors

Subsequent investigations found:

-   Multiple instances of irregular transactions involving amounts over Rs 13,000 crore, all with the knowledge of the top executives of the group companies.

-   29 instances where loans disbursed to borrowers were apparently utilised by the group subsidiaries to repay existing debt obligations.

-   6 instances wherein loans were utilized to transfer funds to the promoters or directors of IL&FS .

-   107 instances of loan ever-greening, loans given without adequate security and management links with companies borrowing from IL&FS.

Facts about Deloitte

- Annual global income for year ended 31 May 2018 - US$ 43.2 billion.

 - Operates in more than 150 countires.

- Employs 286,000 people.

- Five practice areas—auditing, consulting, financial advice, risk advice, tax & legal.

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Scandal    Financial    Jun 16-30 2019    Political-Economy    Privatisation    Rights     2019   

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