IL&FS Mess: Forensic Audit Finds Irregularities, Failure of Internal Control at IECCL
Moneylife Digital Team 28 May 2021
Grant Thornton India LLP (GT), which was appointed to conduct forensic audit of IL&FS Engineering and Construction Co Ltd (IECCL), a unit of Infrastructure Leasing & Financial Services (IL&FS), found potential anomalies about lapse in internal controls in the company. 
The auditor had shared five instances it came across during the forensic audit, out of which four issues were raised by senior officials of IECCL, including Naresh Penumetcha, chief internal auditor of the company. The lapse of internal control ranges from bidding process, inventory, non-recording of bills of sub-contractors, dues of suppliers, unbilled revenue billing, receivable and payables as well as buying poor quality material for various projects undertaken by the IL&FS group company.
In December 2013, Mr Penumetcha has raised the issue of protocols not being followed in the bidding process. In his email to Sambhu Mukherjee (IECCL), Pradeep Kulshrestha (IECCL) and Manoj Gera (former vice-president of IECCL), the chief internal auditor stated that "the review of the chief financial officer (CFO) for all the bidding related documents was not taking place, and the same was considered as non-compliance with the circular, which was issued earlier at the direction of the IL&FS group management board."
Thus, GT says, "it appears that there were potential lapses in following the protocols or the process laid down by the company with regards to the approval hierarchy."
Representatives of IECCL, however, told the auditor that “Process has been streamlined post internal audit observation in 2013. Evidence for the same has been shared with GT on 6 February 2021 at their request.”
Again, in September 2014, Naresh Penumetcha raised issues about inventory. "There was a potential difference in the inventory appearing in the books of accounts and the inventory module amounting to Rs5.64 crore. There was a negative inventory of Rs0.52 crore under the power sector head in the books of accounts. Further, there were missing inventory receipt notes (IRN) due to non-availability of purchase orders to the extent of Rs0.92 crore. Thus, it appears that there were potential issues with respect to inventories, as stated above," GT says, citing the email sent by the chief internal auditor to Saibal Mukherjee, Kishore Josyula and Jitendra Singh, all from IECCL. 
In its response, IECCL informed GT that the difference (of Rs5.64 crore) is mainly due to the value of the transformers that have been rejected by the client and stored at a central workshop at Hyderabad. The issue is sub-judice. Keeping in view the nature of transaction and its age, this value was written off in the books of accounts. As the transformers are physically available in the inventory and the matter is sub-judice, no entry has been passed in the inventory module. Hence, there is a difference between the two.
Commenting on the negative inventory, the company says, "If all the six project codes of the Chhindwara project are considered, the inventory is zero. IECCL internal audit did not consider all the project codes of the Chhindwara package."  
On the missing IRN, IECCL says, "In this case, it seems that due to the operational emergency, materials were procured with email approvals and purchase orders (POs) were raised subsequently. Post this, the necessary steps were taken to regularise the purchase. With reference to the audit observation, post the internal audit observation, it seems that IRNs have been raised for all these receipts.”
In May 2016, Sambu Mukherjee from IECCL sent an email to Anup Gupta, senior vice-president of the company, raising issues with receivables and payables. The email states that "on verification of debtors’ confirmations, it was found that EMMAR MGF (project authority) had made direct payment of Rs2.21 crore to a creditor of IECCL without the knowledge of the accounts team. Further, it was also stated that this instance is a major control failure, and the team is not in a position to reconcile receivables and payables."
The company, however, clarified that since IECCL had no control over direct payment made by the client to vendors, it is not a control gap at the company level.
In the same year on 1st October, Ajay Chitnis, former head of P&M sent an email to Mukund Sapre, managing director of IECCL. In the email, Mr Chitnis raised concerns over the purchase of poor-quality equipment by IECCL from Simplex Infrastructures Ltd for the BMRCL project, which was not safe to use. Further, it was also mentioned that the same was also approved by Sitaraman Ramachandran from IECCL.
GT says, it appears that IECCL had purchased poor quality equipment at the project site leading to safety concerns. 
IECCL sent its response on this query to GT. 
On 8 May 2017, even SR Batliboi & Associates LLP, the statutory auditor of IECCL, raised concerns about various projects. In an email to Krishnaprasad Rayi, SR Batliboi & Associates' assistant manager L Padam Jain noted that IECCL had multiple issues, including non-recording of bills of sub-contractors, dues of suppliers, and unbilled revenue billing in the books of accounts for FY16-17.
IECCL, however, told GT that “KNC Project was a cost plus fixed margin project for IECCL. All the cost in the project was booked with the consent of IL&FS Transportation Networks Ltd (ITNL) and IECCL was paid a fixed margin of 6% on the cost incurred.”
Commenting on the IECCL reply, GT says, "The responses provided by the representative of IECCL provides clarification on recording the cost for the KNC Project. However, our anomaly highlighted those concerns raised by the statutory auditor about the KNC project cost, were not addressed by the representatives of IECCL."
After assessing responses provided by representative of IECCL, the forensic auditor says its assessment about lapse of internal control in the internal audit remains unchanged. 
"Based on our findings and the response received from the representatives of IECCL, our assessment remains unchanged. Further, as the above-cited observations are based on a digital evidence review, hence the details pertaining to approver and executors of the transaction are not available for these observations," GT says in its forensic audit report of the IL&FS group company.
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