PNB Fraud: Auditor Deloitte rang alarm bells on Nirav Modi two years ago

On January 31, the CBI booked Modi, his wife Ami, brother Nishal and Mehul Choksi, promoter of Gitanjali Group and Nirav Modi’s maternal uncle, in connection with a Rs 280 crore cheating case after receiving a complaint from PNB on January 29.

Written by Khushboo Narayan | Mumbai | Updated: February 18, 2018 10:05:51 am
Modi’s firm also said it had a concentration of suppliers and purchasers of cut and polished diamonds Nirav Modi summoned in connection with Punjab National Bank fraud case. (File)

The auditor of Firestar International Ltd, the flagship firm of Nirav Modi, had raised concerns two years ago over the weak internal control system within the company and its Indian subsidiaries, and that the companies derived revenue from a small number of firms.

According to documents accessed by The Sunday Express, Deloitte Haskins & Sells LLP, in its auditor report for financial year 2016, the latest available annual report, said: “The holding company (Firestar International) and its subsidiary company incorporated in India did not have an appropriate internal control system for credit evaluation and setting credit limits for customers, which could potentially result in the respective companies recognising revenue without establishing reasonable certainty of ultimate collection.”

It also said that Firestar International and its subsidiary company incorporated in India “did not have an appropriate internal control system for determination of net realisable value of the closing inventory, which could potentially result in material misstatement in valuation of inventory at the year end”.

After the report, Firestar International had informed shareholders that its board had “taken note” of the auditor’s observation and “directed the management to further strengthen its policies and documentation process for setting credit limits for customers, credit evaluation and for determination of net realisable value of the closing inventory and, if required, seek advice from independent external industry experts for strengthening the policies and documentation process”.

It is not clear if any corrective action was taken by the management. Firestar International has two Indian subsidiaries – Firestar Diamond International Pvt Ltd and Firestar Diamond Pvt Ltd. Deloitte had also drawn attention to “concentration of sales and purchases” in the company. However, the auditor said that it was not putting in any qualifications in its audit report on this issue.

According to Firestar International’s audit report for financial year 2015-16, the company had derived 87 per cent of its revenues from eight top customers based in two countries and amounts receivable from these customers comprised trade receivables of Rs 2,963.63 crore.

The company said it regularly monitored collections from these customers and had collected all outstanding receivables as of March 31, 2016, subsequent to the year end.

Modi’s firm also said it had a concentration of suppliers and purchasers of cut and polished diamonds, in the year ended March 31, 2016, from eight suppliers based in two countries. Firestar International has not listed the names of its top eight customers and suppliers.

“None of these customers or suppliers individually accounted for more than 15 per cent of the total revenues and purchases respectively. The company enters into sale and purchase contracts with customers and suppliers on a principal to principal basis and the company or any of the company’s key management personnel do not exercise any control or significant influence over customers and suppliers, some of whose key personnel were in employment with the company pre-2011,” said Firestar International in its annual report.

Modi and three of his firms – Stellar Exports, Diamonds R US and Solar Exports are under investigation by the CBI and the Enforcement Directorate for the alleged Rs 11,400 crore worth of fraudulent transactions reported at a Mumbai branch of Punjab National Bank (PNB).

On January 31, the CBI booked Modi, his wife Ami, brother Nishal and Mehul Choksi, promoter of Gitanjali Group and Nirav Modi’s maternal uncle, in connection with a Rs 280 crore cheating case after receiving a complaint from PNB on January 29.

According to the complaint, two PNB employees had “fraudulently” issued eight letters of undertakings (LOU) and “transmitted SWIFT instructions to the overseas branches of Indian Banks” to raise buyers credit of Rs 280 crore for Modi’s firms without “making entries in the bank system”.

Subsequently, PNB, in a regulatory filing on February 14 revised the amount of fraudulent transactions by Modi’s firms and Choksi to over Rs 11,400 crore. Modi and his firms are also being probed by ED under the stringent Prevention of Money Laundering Act (PMLA).

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