Statutory Auditors made it convenient for company to defraud it, alleges bank

Statutory Auditors made it convenient for company to defraud it, alleges bank. Forensic audit revealed modus operandi used to manipulate the accounts

Central Bureau of Investigation (CBI) has registered a case against a Delhi based company and its promoters/ directors for alleged defrauding a bank by misappropriating working capital facilities of approx 10 crores sanctioned to the company.

The case has been registered under section 120B, 420 406,467, 468 and 471 of Indian Penal Code.

As per the complaint filed by the bank, for the initial few years the operation of the credit facilities was satisfactory and the need based working capital facilities were provided to the borrower. But later, the conduct of the account deteriorated and inspite of very close follow up, the position did not improve.

Bank from the conduct of account could gauge and apprehended serious irregularities being committed by the borrowers. Bank in order to reach the root cause of the deterioration in the conduct of the account, appointed a chartered accountant firm for conducting the Forensic Audit.

The bank alleged that the borrower company did not provide the requisite assistance to the Forensic Auditors and made all possible efforts to scuttle the un-earthening of the truth.

However, the Forensic Auditors brought out some startling facts. As per forensic report, the borrowers had perpetrated fraud and forgery on the bank. As per the forensic audit report, the following major reasons lead to cheating and forgery against the bank:

(i) Sales were being made continuously on credit inspite of the fact that their concerned customers were not making any payment against the existing previous sales.  Further, borrowers did not provide sales documents under  the  guise  that  the  same  were  either  destroyed  or  misplaced. Confirmation of the debts to the buyers, were returned back with reasons no such address or no such firm or no such address or “no transactions with such party”. Since the Borrower has drawn from the bank against these receivables, thus; it amounted to an act of cheating and forgery by creating forged transactions of huge amount.

(ii) In order to defraud the bank, borrowers set off debit balance of one party with the credit balance of the other parties so as to get the higher drawing limit in the account. This was done with a view to reduce the creditors and artificially creating drawing power in the credit facilities.

(iii) Cheques for huge amount were issued as on the close of the financial year but not presented (inspite of the fact that there was no balance available in the respective account) and over and above the same entries were reversed in the following year. It was an another fraud played on the bank by the borrower in order to reduce the creditor’s level so that the drawing power may be created in the account by forged entries. This also resulted Creditors were being hugely understated.

(iv) Borrowers did not provide confirmation of the balances of the debtors and creditors and the company did not make efforts to recover their dues as well.

(vii) Company had been flouting the Accounting Standards in total disregard to the extant guidelines on the subject of the Institute of Chartered Accounts of India (ICAI).

(a) Valuation of the stocks was highly inflated with a view to cheat the bank.

(b) Non-payment of rent, suit filed against the borrower by the landlords was not disclosed in the financial statements with a view to suppress the liability and cheat the bank.

(c) No proper accounting policy was followed for inter party transactions.  Statutory Auditors  of the company had not commented upon this fact with a view to submit incorrect position of the state of affairs of the company. This was done with a view to manipulate the accounts.

(d) Balance of one associate concern was set off against two associate concerns with a view to manipulate the account.

(e) Sales amongst the associate concerns were not allowed as per the term of the terms· of sanction. As per accounting principle also such transactions had to be reported in the financial statements which was not done with a view to manipulate the account and cheat the bank.

In view of the findings of the forensic auditors, the bank alleged that the borrowers manipulated their account books resulting in under/ over reporting of figures with ulterior motives. They misrepresented and misguided the bank with the sole motive of getting finances based on so called “cooked”/ manipulated data”. Over and above the borrowers did not provide records during the post sanction Inspections carried out by the bank from time to time resulting on bank not being able to verify / cross check the details so provided.

Thus bank alleged that the accused company and its four promoter/ director/ guarantors, violated the sanctioned terms of the credit facility and Indulged In misappropriating the public funds sanctioned by the bank by committing criminal breach of trust whereby the accused persons had diverted the funds and fudged tho financial accounts of tho company and diverting the funds for purposes other than for which the funds were availed by the borrower. The fact was  also overlooked  by tho  Statutory Auditors of the company such as not following the Accounting Standards by the Indian Institute of Chartered Accountants which made it convenient to the company in perpetrating fraud of the bank resulting in public funds at stake.

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