Less than a fortnight ago, the National Financial Reporting Authority (NFRA) sent notices to the existing auditor MSKA & Associates, a member of global advisory network BDO, as well many former auditors of the bank, two persons familiar with the development told ET.
“Since there have been accounting irregularities in the IndusInd derivatives book over a period of time, NFRA has asked for the entire audit files for respective years from all the statutory auditors who had signed the accounts since 2017,” said another person.
While other details, if any, in the NFRA communique are not known, the sources confirmed said the government agency would scan the dossier of working papers and evidence that support the audit exercise and corroborate the bank’s claims on its financials. “First, the audit file will tell the scope of work – i.e., whether the auditor was responsible for the derivatives accounts. Second, what are the supporting documents that have gone in forming the audit opinion,” said an official with one of the auditors.
The past auditors of the bank included PwC (which was the auditor from 2015-16 to 2017-18); S.R.Batliboi (a member firm of Ernst & Young and the auditor for 2018-19); Haribhakti & Co (2019-20, 2020-21); and, M P Chitale & Co along with Haribhakti & Co in 2021-22. MSKA & Associates and M P Chitale & Co were the joint auditors for 2023-24. None of the firms responded to ET’s queries.
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The suspected ‘accounting fraud’ in the IndusInd derivatives book, perpetrated for more than five years by a cohort of senior bank officials, helped the Hinduja-promoted bank either overstate its profits or mask the losses depending on how the foreign exchange rates moved. An examination by NFRA could throw light on whether statutory auditors were looking the other way while the books were cooked.
“Most of the auditors are yet to share the information. They would eventually as NFRA is an organisation constituted by the government under the Companies Act. However, we assume that NFRA must have broached the issue with the Reserve Bank of India as certain information pertaining to loan exposures (of the company that is being audited) cannot be readily shared under the Banking Regulation Act,” said a senior chartered accountant.
The audit files could also hold the Memorandum of Changes (MoCs) which are important documents used to record and communicate material changes or misstatements found in financial statements.
WHY JUST AUDITORS?
The fiercely competitive, yet closely-knit, audit community is divided over the extent of lapses on the bank’s auditors: some are willing to give the auditors the benefit of doubt due to the voluminous nature of the complex trades; however, others insist that instead of giving the IndusInd treasury and asset-liability management desks a long rope, the auditors should have looked deeper into the bank’s ‘other assets’ which held the ‘internal hedge’ transactions which were the core of the accounting controversy. Indeed, in 2024, the auditors had excluded ‘valuation of derivatives’ as a ‘key audit matter’ from the annual report (after including it a year before).
NFRA senior officials did not comment on the notices.
“But, why just auditors? NFRA should question IndusInd management on the explanations given to the auditors as well as examine the role of the audit committee. NFRA lays down the role of the audit committee. The committee is required to assess whether certain assumptions are reasonable, and keep an eye on aspects like expected credit loss (ECL) and possibilities of management bias.”
A few months ago, after the accounting fiasco boiled over, the present auditors had asked the bank to spell out whether the ‘discrepencies’ were in the nature of ‘fraud’. Till then, the IndusInd management has described the issues arising from forex derivative accounting as ‘discrepancy’. However, tagging an irregularity as ‘fraud’ can have serious implications in a bank as the matter is required to be reported in due course with the economic offences wing or other law enforcement agencies. The law requires auditors to alert the ministry of corporate affairs about cases of suspected fraud.
