Rs 114-bn PNB scam: Auditor Deloitte seeks answers from Nirav Modi company

Deloitte Touche Tohmatsu India LLP, the auditor to Nirav Modi’s holding firm Firestar International Pvt Ltd (FIPL), has sought more information from the company after it came to light that Modi companies had defrauded Punjab National Bank of Rs 114 billion.

According to a source close to the development, Deloitte was the auditor to FIPL for two years and signed off the accounts for financial years ended March 2016 and March 2017. The firm continues to be the auditor to both Nirav Modi firms.

Sources said the audit reports for the past two years could not detect any scam at FIPL as the entire fraud took place at Punjab National Bank, not FIPL.

However, the audit report for the year ended March 2016 did make some qualifications on the company’s liabilities but it was not serious enough to trigger any red flags about the company’s deteriorating financial metrics.

The auditor’s role in the entire scam has come into sharp focus as it is the first line of defence for banks and investors against any corporate fraud. In the case of the Satyam scam, its auditor Price Waterhouse (PW) was in January this year banned by the market regulator, the Securities and Exchange Board of India (Sebi), from auditing listed companies for two years over its role in the scam that took place 14 years ago.

Sebi also ordered disgorgement of over Rs 13-crore wrongful gains from PW and its two partners that worked for the firm when the Satyam scam took place. PW has appealed against the Sebi order.

Deloitte did not reply to an email query, but sources said Deloitte had not received any query from any investigating agencies yet.

Interestingly, rating firm, CARE Ratings did issue a red flag in February 2016 that FIPL was suffering from very high leverage, large off-balance-sheet exposure and limited customer and geographical spread.

In February 1, Care further said FIPL was operating on stretched operating cycle till March 2015 which led to full utilisation of working capital bank facilities at a time when its operational performance was on a decline. CARE then downgraded the company’s debt instruments worth Rs 24.6 billion.

CARE also warned about its subsidiary in Hong Kong and Firestar Diamond International Pvt Ltd, saying the companies might not be able to repay their loans, unless the parent company stepped in as a guarantor. While CARE issued warnings, another rating firm, Fitch-owned Indian Ratings, gave good ratings to the company until the scam came to light and put its rating under watch.