Role of Auditors in PNB

SCAM
By Vansh Anand
Roll No- 3191
PRN- 20020621480

Professor- Soma Kulshrestha

About the Firm
Punjab National Bank (PNB), India’s first Swadeshi Bank, commenced
its operations on April 12, 1895 from Lahore, with an authorized capital
of 2 lakhs and working capital of Rs 20,000. The Bank was established
by the spirit of nationalism and was the first bank purely managed by
Indians with Indian Capital. During the long history of the Bank, 9
banks have been merged/ amalgamated with PNB.
Punjab National Bank, abbreviated as PNB, is an Indian nationalized
bank. Its headquarters are in New Delhi, India. It is under the
ownership of the Ministry of Finance, Government of India. The bank
was founded in May 1894 and is the second largest government-
owned bank in India,
both in terms of its business volumes and its network.

Corporate Mission of PNB

Our Mission

“To offer quality financial services by leveraging technology to create

value for customers and other stakeholders, opportunities for
employees and thus, contributing to the economic growth of nation.”
Our Vision
“To be a globally trusted banking partner through customer-centric
innovations, empowering employees and enriching lives of all
stakeholders.”

About the Scam

●
The Punjab National Bank scam relates to fraudulent letters of
undertaking worth Rs 10,000 crore issued by the bank. Bankers
used fake Letters of Undertakings (LoUs) at PNB's Brady House
branch in Fort, Mumbai. The LoUs were opened in favor of
branches of Indian banks for import of pearls for a period of one
year, for which Reserve Bank of India guidelines lay out a total
time period of 90 days from the date of shipment.

●
This guideline was ignored by overseas branches of Indian
banks. They failed to share any document/information with PNB,
which were made available to them by the firms at the time of
availing credit from them.

●
Nirav Modi got his first fraudulent guarantee from PNB on March
10, 2011 and managed to get 1,212 more such guarantees over
the next 74 months.

●
On 29 January 2018, PB lodged a FIR with CBI stating that
fraudulent LoUs worth Rs 280.7 crore were first issued on 16
January. In the complaint, PB had named three diamond
firms, Diamonds R Us, Solar Exports and Stellar Diamonds.

●
As of 18 May 2018, the scam ballooned to over 14,000 crore.

●
The Enforcement Directorate (ED) recovered bank token devices
of the foreign dummy companies used by the fugitive diamond
trader to transfer the fraudulent funds.

●
The probe agency found that Nehal Modi, brother of Nirav Modi
had destroyed the devices and had even secured a server
located
 in the United Arab Emirates (UAE) soon after the scam broke
out. These dummy firms had been receiving the fraudulent
PNB LoUs and were based out in British Virgin Island and other
tax havens.

●
The enforcement agency has so far seized movable and
immovable properties to the tune of Rs 2362 crore in the PNB
fraud case.

How the scam took place:-

Nirav modi exported rough stones from foreign countries worth crores.
The employees at PB Brady House branch fraudulently issued a LOUs
for 365 days without making any provision for collateral security and
bypassing the core banking system (CBS). Nirav Modi's three
companies named 'Diamond R Us', 'Stellar Diamond' and 'Solar
Exports' allegedly raised loans from Axis bank, CO bank and Allahabad
showing LOUs. The firms also raised funds from Indian banks overseas
branches for paying to suppliers. Nirav Modi's firm again requested the
bank to issue another LOU but officials refused on ground that the
company has to keep collateral with the bank but the Modi's firm
argued that no such money was kept on margin for the previous LOUs.
After the PNB's officials started scanning the records, they didn't find
any such transactions and then filed a complaint with the Central
Bureau of India.
Audit firms- introduction

SURI & CO. CHARTERED ACCOUNTANT

Established in 1939 by Late Shri S. Suriyanarayan, a visionary who was
committed to making a real difference in the sphere of Chartered
Accountancy. In 8 decades, Suri & Co has grown in scale and diversity
and is present across 3 states with 7 centers - standing united. Whilst
supporting for decades, our firm strives to reinvent by using
reimagined technology in providing all its assurance, risk management,
and taxation services

The firm now has 10 full-time partners consisting of distinguished

Chartered Accountants and a sizable team of more than 190+
workforce who are determined to offer competent services across all
sectors
SPMG & Company
SPMG & Company is one of the up-coming Chartered Accountants
firms in Delhi, India. The partnership firm was established in 1988 in
Delhi and now has its Presence in Bhopal and Delhi. SPMG & Company
has grown to its present position through sheer hard work, good
client’s relation and their satisfaction.

SPMG offers skills to varied types of clients ranging from corporate

sector, public sector
undertakings, banks, charitable institutions,
small and medium level firms and individuals. The mode of working
of the partners and emplovees depends on the business needs of
each organization, which are then separately assessed and the
solutions tailored as per their requirements.

The partners of SPMG & Company have been involved in the audits
of the Indian Nationalised banks. The partners have a wide
experience of the Banking industry and have carried out the
following work:
●
Statutory Audits
●
Revenue and Inspection Audit
●
Stock and Concurrent Audit
●
Physical Inspection

MKPS & Associates

It was established in 1952. The firm believes in upholding Excellence in
Professional services
and their endeavour is to provide improved quality of services. They
have a multidisciplinary team consisting of Chartered Accountants,
MBA, Cost Accountants and Company Secretaries. They have
presence in all the regions of the country either through Branch or
Associates.
They cater to various professional requirements of their clients which
vary from Assurance & Attestation functions. Taxation to Corporate
Advisory services.

The firm has 21 partners with specialization in different spheres and

more than 120 staff
members including Chartered Accountants and Cost Accountants
supported by experts in
different fields such as Legal, Engineering and Information Technology
(IT).

G.S. Mathur & Co.

The firm is a professional firm established in the year 1950 providing a
bouquet of services
including Audit & Assurance, Tax & Regulatory, Advisory & Consultancy
Services, Accounting
& Business Support and financial Services? It has consistently ranked
amongst the top
professional advisory firms in India and has a well established
reputation for delivering quality and excellence in all its services. It
strives to attain this by blending domain expertise with analytical rigor,
while maintaining an uncompromising focus on quality, and by hiring
and nurturing high quality professionals with a passion for excellence.
It has enhanced value for the clients by providing practical and
innovative solutions tailored to the client's specific needs.

HDSG
A 36 year old firm has carved a niche for itself in India's audit and
allied sectors (with specific thrust and expertise in assurance, risk
advisory, tax advisory, corporate advisory and outsourcing)and can be
reckoned as an Indian firm with a global advantage
Some of the highlights/milestones are:

●
Twelve partners with Two partners being CPA'S and Two
are qualified ISA (Information's systems auditor)

●
Recently a very senior management consultant (Indrajit
Banerjee) with top level corporate experience with corporations
like Lupin, Cairn, Ranbaxy and Indal has been taken on board
as a mentor.

●
Registered with C. A. G. for allotment of statutory audit of
public sector units. Empanelled with RBI for central statutory
audit of Indian banks.

Role of Auditors

●
MK Sharma, the senior internal auditor of PNB Brady House
branch was responsible for auditing for the system and practices
of the branch and to report any fraud with the zonal office.

●
MK Sharma knew about the fraud but didn't file any complaint
with the audit office

●
According to ICAl it is mandatory for every auditor to verify and
scrutinize every transaction that takes place through SWIFT, but
in this case the auditor deliberately didn't verify these
transactions.

●
The Internal Auditor, Concurrent Auditor And Statutory Auditor
Of The Bank should have been checking the transactions which
have been done through SWIFT but they deliberately ignored all
the transactions
 ●
The audit committee of the board oversees a quarterly report ,
particularly on the foreign exchange dealing of the branch but
they didn't examine the quarterly report of foreign exchange
dealing. In March 2013, non-fund based loan of PNB was Rs 407
crore. In March 2014, it zoomed to Rs 3458 crore. In March
2017, it raised Rs 4302 crore.

Audit Reports submitted:-

●
Since the PNB Scam was pertaining to the internal control and
structure of the bank, which in turn ended up affecting the
financial situation of the parties involved, the audit report
submitted seemingly had no issues. Upon further inspection after
an FIR complaint from a whistleblower, it was found that the bank
had been approving LOU's (Letters of Understanding) without
taking any margin, which is a compulsory requirement for an LOU
approval. Upto 1200 false LOU's were approved in a period of 7
years (2011-2018) before the scam was unveiled.

●
Regulations of the Securities and Exchange Board of India require
two-thirds of the members on the audit committee to be
independent to ensure better scrutiny. But the bank's statutory
auditors, signing off the consecutive annual reports, found that
the bank was in breach of this regulation. Instead of fixing this
breach, the bank justified it by saying that it followed instructions
and regulations of the Reserve Bank of India in electing the audit
committee members. All the while, the government nominee
continued to be a member of the audit committee.
 ●
In its First Information Report to the Central Bureau of
Investigation on the scam, Punjab National Bank explained how
the key reason the scam went undetected internally for so long
was that two key softwares to log transactions were not
connected. These two softwares are SWIFT, short for Society for
Worldwide Interbank Financial Telecommunications, and the Core
Banking Solution, or the main online account keeping software.
Consequently, the bank said, its employees were able to send
messages on SWIFT that provided credit to Nirav Modi's
companies (in the name of Letters of Understanding), which
they did not log into the Core Banking Solution.

Recommendations:-

As an Auditor, my approach would have been to ensure utmost

accuracy and diligence while conducting the audits. My prime focus
would have been to ensure that the ethical standards of the Audit Firm
are maintained. Some steps I would have taken to avoid such issues:

1- Questioning the Employees/Relevant Persons: A thorough

questioning of the employees or the persons responsible for
maintaining the financial records of the company, the management of
the company and all the relevant parties. In case of suspicious
transactions of transfers, talking to the bank employees.

2- Regularly checking the guidance note of the Institute of Chartered

Accountants of India- The ICAI Guidance note specifically requires
auditors to check the SWIFT records independently and cross verify
them against the bank's main accounts. There are specific detailed
guidelines for verifying detailed audit trail from SWIFT records with
the
main bank accounts. This is mandated so because many public
sector banks do not have the two softwares linked at the moment.
If I was an auditor I would be checking this every year.

3- Checking the past compliance history of the client the auditor

must check that the client has duly complied with / completed all the
statutory compliances in the past. If it has a poor record , then it
might not be a big deal for the client to not comply with bank’s
guidelines wrt to loans and repayments, when it is not even following
the government compliances/regulations. These types of customers
can be put under scanner to avoid future NPAs.

4- Related party transactions:-

The auditor must check the loan files where related parties are being
given loans by the bank, and thorough checks must be done on their
transactions to check if any business is being carried out by them or
just money laundering is happening.

5- Being vigilant in facilitating loans to Nostro accounts :-

The level of audits and scrutiny prescribed for branches dealing with
foreign
exchange is of a much higher degree than that prescribed for others.
In a regular loan, the bank advances money to the customer. The
customer returns some of the principal amount every month along with
interest, which becomes the bank's income. The kind
of loan the Punjab National Bank offered to Nirav Modi's companies
works a bit differently,
with commission being involved due to the involvement of nostro
accounts and foreign banks to facilitate imports. Auditors are required
to check these commissions or fees separately, if they had done their
due
diligence they would have seen a difference in the number of letters of
understanding moving through the SWIFT software and the missing
commissions against them in the bank's main accounting system.

6- Auditors are required to also specifically check the Nostro

accounts. There are detailed guidelines for it. That should have
thrown up the fact that Letters of Understanding were being issued
but not logged in the main accounts.