An anonymous whistleblower, who claims to be part of the “senior management team at Deloitte, Haskins and Sells LLP (Deloitte)” and has been “privy to several internal irregularities in providing professional services to the IL&FS (Infrastructure Leasing & Financial Services) group” has written to us outlining how the audit firm benefited by helping the failed group fudge its accounts year after year.
In fact, Deloitte ensured a clean chit to IL&FS even when the Reserve Bank of India (RBI) claims to have red flagged a few issues and asked it to reduce its outstanding debt. It is another matter that IL&FS did nothing. The whistleblower says, “The extent of the scam is mind boggling” and hopes that investigation agencies would question members of the audit team, thereby giving him a chance to disclose how the “the senior management at Deloitte is aware of the financial mismanagement and impropriety by the IL&FS group” and actively helped fudge facts.
Deloitte has an internal reporting system; but the whistleblower says, “I have no faith in the current leadership and, hence, am consciously not resorting to our internal whistle-blowing mechanism.” He goes on to provide a few details which need to be understood in the context of what we already know about its relationship with IL&FS.
Deloitte has audited IL&FS Financial Services Ltd (IFIN) for 10 years and remained the auditor until it completed 10 years in 2018. The audit reporthad absolutely no adverse findings even in 2017-18. On 3rd April, the new IL&FS management headed by banker Uday Kotak said that 90% of the loans advanced by IFIN, the lending arm of IL&FS, had turned bad.
1. Deloitte was a beneficiary of IL&FS’s ‘unmitigated growth’ over the decade in multiple ways. It enjoyed a ‘preferred advisor role’ and was awarded several advisory contracts on a ‘single sourced basis’ at ‘substantially high fees’ as compensation.
2. When audit findings would not show IL&FS in a ‘favourable light’ and Deloitte had to take a position, the auditor conveniently relied on “management explanations and comfort letters by compromising on its independent opinion.” At times, IL&FS’s top management would meet and “coerce Deloitte partners for a more favourable position or watered down position.” This was in addition to the ‘watering down of views’ that already happened internally at Deloitte, in the first instance.
3. Over the years, says the whistleblower, this led the entire audit becoming “susceptible to legacy positions and compounded the financial misreporting.” In many cases “the language of the management response was agreed before hand by Deloitte to close its internal reviews.”
4. The whistleblower claims that, in the past three years, Deloitte discovered enough facts that would have qualified the report. However, a specific audit partner (name withheld by Moneylife) would hold close-door meetings with IL&FS’s senior management and find ways to ‘manage’ these by relying on management explanations and opinions.
The whistleblower goes on to outline how Deloitte benefited from these compromises.
“As a compensation,” for accommodating IL&FS in audit “it was agreed that the group will remunerate Deloitte by way of consulting and advisory fees.” Deloitte Consulting, a separate legal entity was paid crores of rupees under the guise of a ‘strategy study for diversification’. He also says, “Deloitte charged a very large sum of fees to recommend creating a more complex financial services business and grow its already stressed books.”
The audit partner allegedly worked with the consulting entity partner to ensure that Deloitte earned a whopping Rs20 crore annually from the IL&FS group as a reward for ‘managing’ its audit. The ‘round-tripping’ of loans, which was disclosed in detail by a forensic audit ordered by the new management at IL&FS, was not only well known to Deloitte’s senior partners, but they also “helped to identify new businesses to cover round-tripping.”
According to the whistleblower, Deloitte employed a senior tax adviser (name withheld by Moneylife) at a very high salary “to ensure that he would continue to earn high revenues for Deloitte.” He helped design complex tax structures that would meet the ‘eye of the law’ while Deloitte would be protect itself through management explanations.
How To Unearth
Worryingly, the whistleblower says that since the collapse of IL&FS, the team at Deloitte has been “involved in a massive cover up and creating paper trail.” He goes on to suggest how investigators can unearth the involvement of Deloitte’s top brass.
Accessing internal mails of select persons and checking their e-calendars for meetings that were not officially minuted.
Confirming internal revenue targets for fees earned from IL&FS group. Checking non-audit and consulting fees billed by Deloitte from IL&FS group, its associates and especially its joint venture partners.
Questioning audit team members dealing with IL&FS.
The question is: Is the government really serious about a clean-up? So far, everybody connected has been treated with kid gloves. The government-appointed board of IL&FS commissioned Grant Thornton to conduct a forensic audit of IFIN (Project Icarus) which came up with a shocking interim report detailing outright fraud, mismanagement of funds, capricious actions and total disregard for regulators and regulation by the previous management. It also narrowed down the responsibility to the committee of directors (CoD) comprising: founder and former chairman Ravi Parthasarathy, former vice-chairman Hari Shankaran, director Arun Saha and IFIN’s former managing director, Ramesh C Bawa. Even this has not led to any decisive action other than issuing a few show-cause notices. What is worse, some very close friends of this cabal have been appointed by the government to head the new management.
The Institute of Chartered Accountants of India is also investigating the role of all auditors and its interim report has already accused them of acting in a ‘fraudulent and negligent’ manner. The Deloitte whistleblower has only confirmed that this was the result of a deliberate nexus with the auditor and for financial benefit.
Moneylife wrote to Deloitte’s India CEO (chief executive officer) Punit Ranjen for his comments. A PR (public relations) agency for the audit firm sent us this reply on behalf of Deloitte.
“Deloitte strongly disagrees with the issues raised in your mail and these seem to be an attempt to malign the reputation of the firm. The statements made are incorrect and misleading. As you are aware, there are ongoing investigations by regulators and agencies. Further, given our responsibility to maintain client confidentiality, we are regrettably constrained from providing you with the information you have sought. However, we wish to emphasise that our work has been conducted in accordance with prescribed standards and regulations.”
We shared the whistleblower’s letter with Claire Hassett, managing director, Deloitte Global Communications who, in turn, appears to have shared it with senior management in India. There has been no further response from Deloitte.
We have also shared the whistleblower’s letter with Uday Kotak, now the chairman of IL&FS, and with an official of the Serious Frauds Investigation Office (SFIO), which is investigating IL&FS, as well as other Central government agencies.
The independence of rating agencies and statutory auditors is critical to keep a check on malpractices of borrowers. If rating agencies and auditors were not derelict in their duty, the shenanigans of IL&FS would have been discovered much earlier. The loss to lenders could be well in excess of Rs30,000 crore. More importantly, if the checks & balances in a system—provided by ratings, audits and inspections (by the RBI in this case) fail—then all investment decisions become like a lottery. If that is the basis on which we are forced to invest, why has the government spent so much money on creating five giant regulatory organisations for the financial sector alone?
Unless those responsible for allowing the IL&FS mismanagement to continue for years are booked, what kind of message are we sending to investors and the people?