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Amrapali fund diversion: Why auditors should be sent to cleaners for enabling dubious cash deals

Nothing hurts more than the spectacle of insiders bringing down the house. More so when the insider happens to be the one vested with the mandate of keeping an eye on the wayward insiders. That Amrapali auditors turned a blind eye to its management’s shenanigans for a quid pro quo, makes it a Satyam redux. Ramalinga Raju of Satyam infamy jacked up the sales of the company by introducing into the books of account a whopping Rs 4,000 crore fictitious sale and to match the credit he debited fixed deposits of the same amount. The statutory auditors PricewaterhouseCoopers (PwC) didn’t care to ask for confirmation of the fixed deposits with the concerned banks, a rudimentary precaution taken even by rookie auditors.

 Amrapali fund diversion: Why auditors should be sent to cleaners for enabling dubious cash deals

Realty. File image. Reuters.

What makes the act of the statutory auditor of Amrapali even more shameful and damning is it allegedly took Rs 125 crore in the name of Gauri Suta Infrastructures Pvt Ltd which was worth only Rs 75,000. Obviously, the statutory auditors took hush money to overlook diversion of funds belonging to the homebuyers to the tune of Rs 2,765 through a maze of 20 shell companies. The startling revelation has been made by forensic auditors Ravi Bhatia and Pawan Aggarwal appointed by the Supreme Court to get at the bottom of the truth.

In the US, peer review is the norm both in the world of auditing and surgery. In the weekly or fortnightly meeting to analyse death on the operation table, colleagues tear into the surgeon who had allegedly botched up the surgery. This keeps everyone on their toes all for the betterment of services to patients. Ditto with auditors. In India, we have an apology of peer review of an auditor’s work. For the first time, the apex court serendipitously proved the immense potential of peer review and forensic audit.

Forensic audit has been shied away by the auditing community under the self-serving excuse harking back to the last century---the House of Lords homily that auditors are watchdogs and not bloodhounds. A lot of water has since flown down the bridge. It is time this lame excuse for inaction was wrenched away from the auditors.

Auditors are the quintessential whistleblowers. Sadly in L’affaire Amrapali the statutory auditors far from blowing the whistle, actively participated in the loot and self-aggrandizement.

The Real Estate Regulation Act (RERA) mandates builders to deposit at least 50 percent of the money collected from homebuyers in an ESCROW account. In its pristine form, the mandate was to deposit 75 percent but somehow the powerful builders’ lobby seems to have softened the blow through hectic lobbying. Be that as it may. One suspects even the diluted minimum is complied with more in breach than compliance much to the chagrin of the hapless homebuyers.

It is worth drawing a parallel between builders and long-term capital gain earners from sale of residential properties---they have to deposit the LTCG in Capital Gains Accounts Scheme 1988 which is nothing but an ESCROW account which the banker allows to be withdrawn only for buying or constructing another residential house within two and three years respectively. Why can't the more resourceful builders then be made to deposit every rupee into the ESCROW account and allowed to withdraw subject to safeguards to foil diversion of homebuyers’ hard-earned money.

Coming back to Amrapali, the Supreme Court should do an encore of Skipper Construction Ltd and do complete justice to homebuyers invoking article 142 of the Constitution. And by doing so it would be using this extraordinary power in favor of the small man, namely the homebuyers as against buyers of commercial flats in Skipper. A forensic audit is a good first step. Hopefully, the Supreme Court would lift the corporate veils of all the 20 conduits and retrieve the loot for the poor homebuyers.

And the statutory auditor of Amrapali should be sent to the cleaners by the Council of the Institute of Chartered Accountants of India instead of investigating him under its self-regulatory powers. Yes, he should be tried by the High Court for his brazen professional misconduct. The fence should not be allowed to eat the crop. If the forensic auditor’s preliminary findings are true, it has been a Faustian deal between Amrapali promoters and its auditors who have allegedly sold their soul for a mess of pottage.

(The writer is a senior columnist and tweets @smurlidharan)

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Updated Date: Oct 26, 2018 09:48:14 IST