Chit fund auditors under Corporate Affairs Ministry scanner

The ministry of corporate affairs is examining the role of auditors of the chit fund companies that are under its scanner for allegedly duping depositors even as theInstitute of Chartered Accountants of India (ICAI), the accounting regulator, has called for audit records of all the deposit taking companies under investigation. The ministry has written to its regional director (RD) of eastern region on April 6 asking it to lodge a formal complaint against the auditor of Rose Valley Real Estate Constructions Ltd with the ICAI for what the MCA termed as 'serious violations'.

The ICAI on its part has asked the MCA's investigation unit, the serious fraud investigations office (SFIO), for audit records of companies that raise deposits from the public and are currently being investigated. "We have written to the SFIO requesting them to share the details of all the auditors of the deposit taking companies it is currently investigating," ICAI president Subodh Kumar Agrawal said.

Last month, MCA asked the SFIO to investigate a total of 53 deposit taking companies belonging to Sunshine India Land Developers, Icore E-Services Ltd, Rose Valley Real Estate & Construction - apart from the Saradha group as the regitrar of companies had 'prima facie' found evidence against these companies.

The auditor for Rose Valley Real Estate and Construction, US Saha & Co said that it had replied to all queries raised by the RoC over the company's accounts. "We followed all rules and have duly informed the RoC, we have nothing more to add," the Kolkata-based auditor told ET.

In October 2012, the RoC had submitted the outcome of a technical scrutiny of Rose Valley, a deposit-taking company, to the MCA, its parent body. The RoC in its report claims the auditor had violated over a dozen sections of the Companies Act while verifying the books of Rose Valley. Further, its replies to the RoC's queries were "evasive" the report says. The RoC report is the basis of the April 2013 MCA letter to its regional director.

"The auditor has failed to diligently perform the duty cast upon it by the section 227 of the Companies Act," the RoC had observed. "The auditor did not report about the number of parties involved and the total amount of unsecured loans given out to companies, which had the same management and that too at 'nil' rate of interest. Further, in not specifying whether such loans were prejudicial to the interests of the company, the auditor failed to do his duties in not reporting those unsecured loans in the manner required under CARO 2003," the RoC has noted.

Similarly, according to RoC, the auditor did not make mandatory disclosures with regard to redemption of debentures worth 5 crore, the duration and the category of investments of 182 crore made in shares and securities. Also the auditor did not disclose the dividend earned from investments and whether it was from trade or from other investments. Further it overstated the company's profits and mislead the authorities in saying that the earning per share was disclosed in the balance sheet, which was not the case.