Forensic audit is more a ‘witch hunt’ now: Srei group

The forensic audit on two Srei group of companies — Srei Infrastructure Finance and Srei Equipment Finance — is seen more as a ‘witch hunt’ by the company.

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According to a senior professional at Srei, the forensic audit conducted by KPMG into Srei Infrastructure Finance and Srei Equipment Finance initiated at the behest of some lenders, is more of a “witch-hunting” now that a transaction audit has already been initiated by the administrator.

Talking to BusinessLine,the professional said that the KPMG audit should have technically stopped as soon as the company went into insolvency and was taken over by an administrator. The Srei group companies have undergone as many as six audits in about a years’ time and the seventh one has been initiated by the administrator who has appointed BDO India LLP as the transaction auditor under the insolvency and bankruptcy code (IBC).

It is to be noted that a recent application filed by Hemant Kanoria, founder and erstwhile director of SREI, sought setting aside the KPMG audit into the company, citing the issue of a possible parallel auditing as it is currently undergoing corporate insolvency resolution process (CIRP).

The KPMG report mentions certain “connected party” lending by Srei companies. However, the report is “inconclusive” as there was no discussion with the erstwhile management and their input was never sought before the submission of the report, the professional said.

RBI special audit

The Reserve Bank of India had in December 2020 and January 2021 conducted a special audit which had revealed ever-greening of loans, negative capital-to-risk (weighted) assets ratio (CRAR) and default in payments of over ₹10,000 crore to lenders, prompting it to supersede the boards of Srei Infrastructure Finance and Srei Equipment Finance.

“The draft report was given in September and then in three months they changed the whole report and submitted it without any discussion with the management or without taking their input. You cannot have a report without taking input and discussion. This was done in three months’ time while the management was not there. And when they submitted the report in December, they themselves said that their report is inconclusive. So it looks like there is some vested interest,” the professional said.

Forensic audit ‘generally not referred to’

According to Mamta Binani, past President, ICSI, conducting a transaction audit is the usual practice once a company enters the insolvency process and it is done for a look-back period of one year (non-related party) or two years (for related party).

“When there are some preferential transactions found out, then a transaction audit is done which is to be mandatorily initiated, if at all, by the RP (resolution professional) — the administrator in this case. The forensic audit, which may have been done by lenders when the company has not entered the frame of insolvency, is generally not referred to. In most cases, a transaction audit is done as per the requirements of the IBC,” she said.

‘Damning’ evidence

However, in one of the recent submissions made before the Kolkata bench of National Company Law Tribunal, the counsel appearing on behalf of the consortium of lenders claimed that there were several “damning parts” in the forensic audit report by KPMG in the Srei group companies.

According to the counsel, there is nothing that can stop banks from conducting an investigation as they are duty-bound and legally obliged to file a complaint (if the situation warrants). He also argued that while dealing with cases of fraud and embezzlement, banks should not merely look at expeditious recovery of amount involved, but also be motivated by public interest.

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