THE INSIDE JOB
The PNB Scam has rattled bankers,
regulators and the common man alike. It is not just because this is the biggest
ever the country has seen, but a kind of manipulation that went undetected for
years, raising questions about bank safety systems where crores keep their hard-earned
savings. ET taken a deep dive into the many questions it raises.
Mumbai: The biggest
corporate fraud in Indian history at Punjab National Bank exposes the poor
auditing standards at Indian firms as the fraud was allowed to perpetuate for
nearly 7 years before getting detected accidently.
What is shocking is that
branches are not only just audited by one team of auditors, but there are
concurrent auditors. If something is missed by two teams for years, it raises
questions about the quality of such auditing.
“Any business activity
undertaken by the bank is audited not only by the internal audit team of the
bank but also the concurrent auditors auditing a single branch, it is shocking
that such an incident went unnoticed by not only auditors but the senior bank
staff as well,”said a banker who didn’t wish to be named. “Audits look at the
companies approved to do business, the bills that are funded, letters of credit
issued, short term funding tools etc.”
State-run Punjab National
Bank was hit by a Rs. 11,300 crore corporate scandal with its staff conniving
with jewellers Nirav Modi and Mehul Choksi of Gitanjali Gems. The bank issues
letters of undertaking since 2011 to various banks which funded the diamond
merchants. These LOU were getting rolled over as soon as they expired, but came
to light only when the officer handling the account all these years retired
recently.
These kinds of activities
should have been caught by the auditors quickly as there is concurrent auditors too. But for PNB, it claimed that its
internal core banking system and the international messaging system operated by
swift were not integrated which it believe led to this fraud.
Industry experts point out
that there were mainly two issues as far as statutory auditors are concerned in
the case. As per the standard practice prevalent among most PSU banks several auditors
across cities are appointed. These auditors don’t have visibility of all the
transactions with the particular business and have access to data pertaining to
one branch. Also for most of these auditors PSU banks are the biggest and in
many cases sole consumers. This leads to a situation where auditors may not be
really independent, say industry experts.
“In this particular case
there was a systematic failure of all the institutions involved including bank,
independent and other regulators and it would be unfair to merely point fingers
at the auditors. That said auditors must be of size and scale commensurate with
clients’ operations. They must be able to discharge their and mustn’t not be
exercise their independence. Banks need to be more assertive in appointment of
auditors of clients as well as their independent directors” said Suresh Surana,
of RSM India.
Some of the auditors of the
bank according to its annual report are, Chhajed & Doshi, R Devendra Kumar
& Associates, Hem Sandeep & Co., Suri & Co., SPMG & Co. Its
auditors in 2011-12 were VK Verma & Co., Mookherjee Biswas & Pathak
Amit Ray & Co., Sarda & Pareek Borkar & Muzumdar G.S. Madhava Rao
& Co. None of them could be independently reached for their comments.
PSU banks’ system of
appointing auditors has remained archaic. While a private sector bank would
have one or two auditors, the number runs into hundreds for state run lenders.
Recently, a PSU bank saved over Rs.35 crore by just reducing its concurrent
auditors 1400 to just 30. Even the Big 4 firms charge anywhere between Rs. 1.5
crore to Rs. 5 crore to audit top Indian firms.
“When we are handling over
1400 auditors, the quality was bad; we were unable to use the audit reports.
Now people actually have time to go through the reports because we now have
consolidated reports. So we now have 14 reports instead of reading hundreds of
reports,” the banker said.
Audit experts say that while
valuations are subjective some qualifications in the audit reports must have
been added more so because prices of diamonds and gold are easily available and
auditors can actually go and check if the inventory is merely on paper or it’s
actually with the company. Apart from this there could be issues where the
auditors didn’t raise red flags.
“In the gems and jewellery
business, unlike say in a steel business, red flags should have been raised
when inventory kept increasing.
Refer: economictimes.indiatimes.com
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