Markets

Auditors raised red flags on IL&FS in past three years

By Pavan Burugula

Mumbai: Auditors of beleaguered Infrastructure Leasing & Financial Services (IL&FS) had raised at least half a dozen red flags in the past three years, two auditors privy to the development said. These warnings range from concerns about the manner in which asset sales were being carried to companys ability to raise further funds.

Auditors are planning to use these red-flags as a major defence to insulate them from the ongoing crisis going on at IL&FS, auditors cited above said. However, experts are divided on whether the auditors did enough to prevent the crisis.

The Serious Fraud Investigation Office (SFIO) has already sent out notices to all the three auditors seeking response on their role in the financial debacle at IL&FS that has come to light. “We have received notices from SFIO seeking response. We are planning to seek more time from the agency since we have to evaluate several past records,” said an auditor cited above.

EY, Deloitte and KPMG have undertaken the audit of IL&FS and its subsidiaries during last five years. An email sent to KPMG remained unanswered, while EY and Deloitte declined to comment on the matter.

During the statutory audit for FY18, auditors had raised questions about ability of the company to service the existing debt obligations. In response, IL&FS management submitted a statement, saying Life Insurance Corporation (LIC), one of its primary shareholders will be infusing fresh capital into the company. However, the management did not submit any further proof of such fund infusion. “We were not in a position to conclude whether the capital infusion will happen or not. Hence we had given a disclaimer saying any inability to raise fresh equity as proposed could put the finances of the company in a precarious position,” said an auditor cited above.

In another instance, during FY16 and FY17 audits, auditors had raised questions about the asset sale disposal of IL&FS and its subsidiaries. “Some of the asset sales were happening in absence of any proper strategy. We brought it to the attention of the board and audit committee,” said another auditor cited above.

In another instance, auditors of IL&FS Transportation Networks (ITNL) had raised concerns about ability of the company to raise fresh funds. “The auditor clearly told the management that the material uncertainty over the companys fund raising ability was a growing concern.”

Experts are divided about whether auditors had done enough in spotting anomalies and averting a crisis situation.

“The auditors cannot wash away their hands from the incident just by saying they had issued modified opinion. One has to see what sort of language they have used and whether they have done enough to ensure anomalies have been appropriately highlighted,” said Sandeep Parekh, founder, Finsec Law advisors.

Shriram Subramanian, founder of proxy advisory firm InGovern says the role of auditors is to authenticate the financial statements provided by the company not to pass any comments on the future business prospects. “Auditors are not supposed to comment on business aspects such as future cash flows or commercial viability of a company. They can be held responsible if they have approved financial misstatements,” he added.

Most of the comments were included as a part of modified opinion in the auditors report.

During an audit, auditors give their opinions in three broad categories — clean, modified and disclaimer.

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