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DHFL has diverted Rs 34,615Cr borrowed from banks. The CBI has alleged that DHFL‘s promoters formed 87 shall companies, created more than 2,60,000 "Fictitious borrowers' and set up "Virtual Branch "to divert money borrowed from banks".

In case NEFRA thinks that Publication of Annual Transparency Reports by Auditors/ Audit Firms could control financial frauds like DHFL case, the NEFRA may go ahead with the implementation of the proposal of “Publication of Annual Reports (ATR) by Auditors/Audit firms.

We have been talking about Standards on Auditing and Audit quality and ICAI conducts number of seminars on this subject to educate the auditors on implementation of standards on Auditing. Why SA 240 could not help the auditors to report on Financial Fraud taken place in DHFL case. 90% of CAs doesn't even know what is the funds diversion, how to identify and calculate the fact of funds diversion from the face of company balance sheet. Even ICAI has thrown the responsibility of identification of funds diversion on the banks saying that it is their headache and not ICAI's till the date MCA made mandatory disclosure of funds diversion in CARO.

Comments On Publication Of Annual Transparency Reports By Auditor/Audit Firms

Funds diversion is a book entry, the transaction is very much available from the company books of accounts and it is a fraud. The fact of funds diversion is being concealed on the face of balance sheet because of deficiency in the format of balance sheet. The status of bank borrowings changes on the face of balance sheet when the funds are diverted for some other purpose. Does it not mean that the stakeholders are being cheated, deceived and defrauded? Further, the system is encouraging the practice of funds diversion by the fraudsters by designing the format of balance sheet not transparent. Why the shareholders of DHFL should not make ICAI and MCA responsible for the financial fraud of Rs 34,615 Cr taken place as the auditors have failed to report the funds diversion because of deficiency in the format of company balance sheet. Have the regulatory authorities have asked the auditors of DHFL and its group of companies as to why SA 240 was not followed while auditing these companies? Whose money is this? Should the public pay for the failures of regulatory authorities?

The Military has been doing their job sincerely and perfectly and as a result a third country has to think twice before declaring war against INDIA. The scientists are doing their job so effectively and it is because of their contribution the virus like Corona has been controlled and people have been saved thereof. Law and order is being maintained strictly and people are happily living in the country. Why CAs, the professionals in accountancy and finance have failed to control the practice of frauds by fraudsters and wilful defaulters . Should we expect the Military, Scientists or the Police to come to the rescue of stakeholders and save India from financial frauds? In case it was their responsibility, probably they could have done it effectively and saved the country from the financial fraudsters. The banking industry has written off more than Rs10.00 lakh Cr because of negligence, careless and irresponsibility of regulatory authorities. The public is paying all the losses with their hard earned money. Is it what regulatory authorities have been contributing to the country just because they are the controlling authorities of CA profession?



But all these basic requirements are missing in the present format of financial statements that encourages the practice of financial frauds by the fraudsters and the wiilful defaulters

Can a stakeholder get the information of variable cost, contribution and breakeven point from the present format of statement of Profit & Loss Account? The format of Profit & Loss Account must differentiate between the direct cost and the indirect cost. To where a stakeholder should go for certified direct costs when the format of profit & loss account is silent on details of these costs. The components of direct cost play a major role in making further economic decision by the stakeholders. How to arrive the cost of production, work in process and the cost of sales without reporting direct costs in the format of Profit & Loss Account? Is it not a failure on the part of regulatory authorities?

When it is cost of consumption for manufacturing activity why it should not be Cost of goods sold for trading activity? No uniformity in presentation of financial statements. Is it not careless and negligence on the part of regulatory authorities?

Format of Company Balance Sheet

The Investments which is not part of operating cycle are considered as part of Current Assets on the face of balance sheet. This would influence the Current Ratio and further economic decision of the stakeholders. Let us take a case where a manufacturing company is having working capital loan of CC limits for Rs 500 Cr. The company has diverted Rs 200 Cr out of Rs 500.00 CC limits and invested in capital market. The investment in capital market is reported under the head Current Assets on the face of balance sheet.

Let us see the influence of reporting diverted fund as investment under the head Current Assets

  1. The fact of diversion of funds is concealed on the face of balance sheet.
  2. It influences the Current Ratio.
  3. It influences further economic decision of the stakeholder.
  4. The shortfall in working capital loan would seriously affect the regular operations of the company.
  5. The bankers are deceived, defrauded and misguided and this would influences the banks further economic decision,
  6. The loan account would become NPA.
  • The balance sheet lacks the transparency and does not give a true and fair view.
  • The charge against investment in capital market is not created with the ROC.
  • When the charge is not created with the ROC for diverted loan of Rs 200 Cr , the corresponding CC limits would become unsecured loan. But the company would continue to declare Rs 500.00 Cr as Secured Loan while the actual secured loan is 300.00Cr only.
  • The company would become Sick one day.

The beneficiaries of present format of balance sheet

  1. There is a scope for Insolvency Professionals as they get additional business whenever funds are diverted by wilful defaulters and the units become sick for which they must be thankful to the regulatory authorities.
  2. The other beneficiaries are the fraudsters /wilful defaulters as they are being protected from the notice of banks by concealing the fact of funds diversion on the face of balance sheet. There is a good encouragement of practice of funds diversion and support to the fraudsters /wilful defaulters and what else they want! They must be grateful to the regulatory authorities forever.

These are the deficiencies in the present format of company balance sheet.

In case your people think that the present format of company financial statements are informative, transparent and gives true and view then even the God cannot save this country.

Why MCA /NEFRA should not look in to the implementation of CARO as it is applicable from the year 2021-22. The auditors are required to report funds diversion in CARO. Why MCA should not identify the cases of funds diversion from the CARO reports of Auditors and direct the companies to bring in diverted money to safeguard the interest of the stakeholders?

TATA Motors Ltd has diverted Rs 11,373.20 Cr during the year 2021-22. The DSCR is 0.01 and Current Ratio as at 31-03-2022 is 0.58. The company is under losses. Despite of all these facts the Equity share with face value of Rs 2/- is quoting at Rs 393 as on date. Is it how the regulatory authorities are protecting the stakeholders? The most unfortunate fact is that financial loss of public money is not painful to any one and that is the reason why the regulatory authorities have been neglecting the stakeholders for decades together and the public has been paying the cost of their negligence.

Sir, it is not the Publication of Annual Transparency Reports what is required in the present scenario where the fraudsters and wilful defaulters have been eating away the public hard earned money. NEFRA being part of a responsible regulatory authority please work out on why the accounting system has failed in India in safeguarding the interest of stakeholders, protect the public hard earned money and save Indian economy.


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kotte murali krishna
Category Audit   Report

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