Serious Fraud Investigation Office lens on IL&FS auditors

MUMBAI: India’s Serious Fraud Investigation Office (SFIO) has now turned the lens on auditors of Infrastructure Leasing and Financial Services’ (IL&FS) holding company and IL&FS Transportation Network, in what could be the biggest probe involving about 35 audit firms including some of the biggest Indian firms.

Investigators would be looking at the role of senior executives in both the companies, independent directors and audit committee members, said two people aware of the development. The 35 audit firms were auditing more than 300 subsidiaries of the group.

The SFIO, after filing the charge sheet against IL&FS Financial Services (IFIN), would start probing IL&FS and ITNL, two sources with direct knowledge of the matter said.


“In the next few days notices would first be served to several individuals and normally followed by submission of files and documents, but the investigators have these in some cases. Depending on what comes out of these, statements of some individuals would be recorded in some cases again for IL&FS and ITNL,” said one of the persons quoted earlier.

ET has learnt that notices will soon be dispatched to auditors, including EY India, and officials handling these accounts will be called in for questioning. Deloitte Haskins & Sells was the principal auditor for IL&FS till 2016-17 and was replaced by SRBC & Co, an EYaffiliated firm for the next two fiscal years. For ITNL, Deloitte Haskins and Sells was the sole auditor in 2015 and jointly audited along with SRBC & Co in 2016-17. From 2017 to 2019, SRBC took over as sole auditor.

About 35 other firms audited financials of the subsidiaries. In the case of IL&FS, ITNL and IFIN, principal auditors only audited part of the accounts and relied on the opinion of auditors of subsidiaries allowed under auditing regulations.

Some of the major Indian firms including Sharp and Tannan, KS Aiyar & Co and MP Chitale were auditors to the subsidiaries.

This is one of the areas that could have led to the problem, industry trackers said.

“The main problem is that in a group of companies, auditors are different firms. As per the charge sheet, evergreening of loans was happening by routing money from one group company to another through an unrelated party, but it would be very difficult for auditor of a single company to know what has happened to the loan after it was disbursed,” said Jeenendra Bhandari, partner, MGB & Co.

Take the case of IL&FS: Principal auditor SRBC (EY) did not audit 141 subsidiaries with total assets of Rs 1lakh crore and Rs 18,226 crore in revenue. About 26 joint ventures that had a revenue of Rs 3,400 crore and total assets of Rs 18,000 crore were audited by other auditors. Similar situations also prevailed in audits by Deloitte Haskins and Sells and BSR (KPMG) at IL&FS and IFIN in other years.

“Whenever any audit failure happens, regulators merely look to fine or to punish an audit firm or partner. Since the broad-based structural issues are neither recognised nor addressed, such problems have kept on popping up and will continue to do so” said Raghu Aiyar, CEO, KS Aiyar & Co.

One of the issues thrown to the forefront in the audit of IL&FS, ITNL and IFIN is qualifications. As per the Indian auditing regulations, auditors could give qualifications wherever they don’t agree to the position taken by the management. In all the three cases the auditors have given the qualifications.