Govt gets tough with auditors, at last PDF Print E-mail
Thursday, 13 June 2019 07:50
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Given their role as watchdogs, auditors have to pay the price for negligence; complex structuring, though, makes auditing tougher


It is not just auditors & raters that got it wrong in IL&FS, so did RBI and other regulators. Govt needs to fix its rules and there has been little or no action on reports of siphoning funds by using opaque structures


You would think that, given that the auditor knew that there were such a large number of subsidiaries and related entities where close to `90,000 crore of debt was parked, it would have flagged this and pointed out that it needed to audit the step-down subsidiaries as well. And surely the auditor was derelict in not pointing out, upfront, that the rosy financial ratios in the annual report meant little once the overall group picture was looked at?

It is, of course, also true that given the financial jugglery many firms such as IL&FS indulge in, auditing has become a lot more complex. The latest report on India’s NBFCs by market intelligence firm REDD points out, for instance, that several of these high-profile firms use what they call ‘box companies’ to hide loans/debt and to avoid regulatory requirements such as on capital adequacy or exposure to related parties. As REDD puts it, “By using the box structure, we also reckon that some of these companies have found an alternative to the concept of a rollover or evergreening …Banks and NBFCs just lend to a new proxy/dummy entity which advances funds to the borrower entity to repay the loan to Banks/NBFC, avoiding reporting NPAs and a knock-on effect on equity multiples”.

While the authorities need to examine the intricacies of these structures and the fund flows that REDD details, the government also needs to revisit the issue of how many layers of subsidiaries should be allowed; IL&FS had 347 entities held via four levels of step-down subsidiaries; and there were 142 entities at level 4! And while the government is penalising auditors, no action has been taken against the company’s independent directors—the risk management committee, headed by the LIC managing director, met just once in three years, years when the consolidated debt almost doubled.

And, while it is true that the rating agencies also gave IL&FS a good rating by failing to look at consolidated accounts, they weren’t the only ones at fault. Apart from the fact that regulators like RBI were napping, it is shocking that Sebi was willing to put in abeyance its August 2017 circular that made it mandatory for all listed companies to disclose all defaults in payment of interest and repayment of the principal within one working day. Not only did RBI fail to realise what was happening in IL&FS despite it being classified as a systemically important company but also it continued to push for not making names of defaulters public along with the dates of default—without 24×7 defaults data, how can a rating agency construct a model to predict default? Nor did any regulator insist that all firms be forced to put out some basic group-level data. With India being rocked by one NBFC crisis after another, the least one should expect is that the government will come out with a comprehensive solution, and take more than action on banning auditors.





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