EXCLUSIVE: Trouble for PNB top brass as CVC comes down hard on auditors post Rs 14,000 crore fraud

New Delhi: The anti-corruption watchdog, the Central Vigilance Commission (CVC), is perturbed over the Punjab National Bank (PNB) auditor’s lackadaisical approach despite the fact that the largest banking scam exploded under their watch. Firstpost has reviewed a CVC note, which reveals that statutory auditors, who had conducted an audit of PNB's Brady House branch, provided vague replies to the CVC on the Rs 14,000 crore fraud and conveniently put the blame on others for failing to detect massive irregularities.

The CVC said most of the auditors, who have been questioned took the plea that their mandate was not to check individual entries and that it should have been done by either the concurrent auditor or the revenue auditor. The CVC also indicated that statutory auditors were trying to cover-up by giving misleading responses.

“Statutory auditors have mentioned the irregularities as a passing remark without giving details or quantifying. This shows that they have verified the entries but were averse to pin point the irregularity for whatever reason,” the CVC said in a scathing remark charging auditors.

 EXCLUSIVE: Trouble for PNB top brass as CVC comes down hard on auditors post Rs 14,000 crore fraud

Representational image. Reuters.

It is pertinent to mention that union minister Arun Jaitley had also questioned the role of auditors in the PNB fraud indicating they had failed to detect the huge fraud despite multiple layers of auditing. With the CVC unraveling the lapses, the investigating agencies are likely to probe appointments of auditors by the top management of the bank.

The CVC, which examined more than 10 statutory auditors, who had audited the books of the Brady House branch since March 2009 was shocked to note that some of the auditors appeared before the commission without having backup reports, working sheets and gave vague replies to queries on the fraud allegedly engineered by diamantaire Nirav Modi and his uncle Mehul Choksi, who owns Gitanjali Gems.

The CVC clearly stated that auditors, it appears, “were feigning ignorance of the whole issue.”

“Auditors were not able to explain what they were supposed to have verified, what they verified and what are the areas they failed to verify…Auditors were not able to specify the areas on which they had done test check and about the methodology prescribed by the Reserve Bank of India (RBI) for test checking. The observations of auditors have been put up to audit committee and audit committee of board. Action taken by the board on these observations have not been clarified,” the CVC said.

The CVC had also discussed the issues with PNB Managing Director Sunil Mehta, senior officials of the finance ministry and the Chief Vigilance Officer (CVO) of PNB and other banks, which had discounted fraudulent letters of undertaking (LoUs) issued to Modi and to the Gitanjali group companies. What is surprising is the fact that not all the auditors were on the same page while responding to the CVC's queries, making it quite apparent that tailored replies were aimed to cover up the lapses. This aspect is very clear from the two observations made by the auditors and included in the CVC note where some auditors mentioned that they have never heard about LoUs but one of the auditors during the questioning mentioned that they had seen hard copies of SWIFT messages in the individual loan cases but did not check the dump of SWIFT messages.

The statutory auditors have also argued that their work is in the nature of the balance sheet and their method of audit is four fold- auditing for documentation, creation of security, operational issues and analysis.

“Statutory auditors are not supposed to do transaction audit and mandate is for doing balance sheet audit and for verification of assets and liabilities reported. The man days allocated for statutory audit of branches/ bank is abysmally short and it is humanly not possible to verify every entry within the allocated time for any big branch. Hence, do test check and rely on the various other audits undertaken during the year for example concurrent audit, internal audit, revenue audit etc. to know the concern areas. Gap in buyer’s credit transactions has been brought out in long form audit reports for the year 2009-2010 and 2010-11. The problem of buyer’s credit transaction is for the PNB as a whole and not that of Brady house alone,” the auditors told the CVC.

The watchdog, however, has pointed out that the auditors failed to carry out reverse checks by taking high value commission entries with underlying transactions, which could have brought to light the aberrations at the Brady house branch. Similarly, an analysis of commission booked for the different quarters as well as in the previous year could have brought to light any drastic increase in commission income, which could have given reason to check the underlying transactions. Auditors did not do that as well, said the CVC note.

Whether an analysis of business growth falls under the mandate of the audit of business is not clarified by statutory auditors. The above checks and analysis, when not done by the concurrent auditor and revenue auditor raises a question about the integrity of the audit, the CVC note added.

The CVC also raised a question over compliance saying that all contingent liabilities were not identified and substantive audit tests were not carried out.

Firstpost has also accessed the annual returns filed by Firestar International Private Limited, owned by Modi, which mentioned that it had secured loans to the tune of Rs 1,518 crore and unsecured loans of merely Rs 10 crore, whereas the huge fraud was committed through buyers credit. Firestar's internal audit committee meetings were held in October 2016, February 2017 and March 2017.


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Updated Date: Jul 13, 2018 13:25:50 IST