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Role of Auditors in the Punjab National Bank Scam
Table of Contents
Table of Contents 2
Basic Terms to Know: 3
SWIFT: 3
LOU: 3
CBS: 3
Nostro Account: 3
Introduction 4
About the Bank 4
About the Scam 4
How the scam took place: 5
Reasons why the scam was to be undetected: 6
The Failure of Auditors: 6
Management Failure: 6
Non-Linkage of SWIFT with CBS: 6
No Rotation of Employees: 6
Assets Seized 7
List of Auditors & Firms: 8
SURI & CO. CHARTERED ACCOUNTANT 8
SPMG & Company 8
MKPS & Associates 9
G.S. Mathur & Co. 9
HDSG 9
Role of Auditors 10
Key Points: 10
General Thoughts: 10
About the Chain of Command: 11
Audit Report Submitted 12
Our Opinions & How Could the Scam Have Been Prevented 13
References 14
Basic Terms to Know:
SWIFT:
Society for Worldwide Interbank Financial Telecommunications (SWIFT) is a vast messaging
network used by banks and other financial institutions to quickly, accurately, and securely send
and receive information and instructions through a standardized system of codes. SWIFT assigns
each financial organization a unique code that has either eight characters or 11 characters.
(Investopedia, n.d.)
LOU:
Letter of Undertaking (LOU) is a widely accepted provision of bank guarantees, under which a
bank can allow its customer to raise money from another Indian bank's foreign branch in the
form of a short term credit. The LOU serves the purpose of a bank guarantee for a bank's
customer for making payment to its offshore suppliers in the foreign currency. For raising the
LOU, the customer is supposed to pay margin money to the bank that issues the LOU and
accordingly, they are granted a credit limit. (NDTV Profit, n.d.)
CBS:
Core Banking System (CBS) is a system where all branches are inter-connected to ensure that the
bank customers - regardless of their home branch - are able to operate their account and transact
in any of the member branches located anywhere in the world. After the advent of this system, a
customer is no longer a customer of a branch, but a customer of a bank. All the transactions are
updated real-time. (Business Today, n.d.)
Nostro Account:
A nostro account refers to an account that a bank holds in a foreign currency in another bank.
​
​
Nostro accounts are frequently used to facilitate foreign exchange and trade transactions, with
the purpose of simplifying the process of exchanging and trading in foreign currencies.
(Investopedia, n.d.)
Introduction
About the Bank
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. (Wikipedia, n.d.)
About the Scam
● The Punjab National Bank scam relates to fraudulent letters of undertaking worth ₹ 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, PNB lodged a FIR with CBI stating that fraudulent LoUs worth Rs Rs
280.7 crore were first issued on 16 January. In the complaint, PNB 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 ₹
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
PNB 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, UCO bank and Allahabad bank by 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 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.
Reasons why the scam was to be undetected:
The Failure of Auditors:
M. K. Sharma, the internal chief auditor for Punjab National Bank’s Brady House Branch, was
allegedly responsible for auditing the systems and practices and reporting deficiencies to the
zonal audit office.
He failed to detect any frauds that took place in PNB Brady House branch, Mumbai.
Management Failure:
The management of the Punjab National Bank’s Brady House Branch was itself involved in the
scam. The names of persons involved (and arrested) were:
➢ Gokul Nath Shetty (Retired Deputy Manager)
➢ Manoj Kharat (S​
​
ingle Window Operator)
➢ Hemant Bhat (Clerk and Authorized Signatory)
➢ V. Bhechhu Tiwari (Chief Manager - Forex Department)
➢ Yashwant Joshi (Scale II Manager - Forex Department)
➢ Parul Sawant (Scale-I Officer - Handling Exports)
Non-Linkage of SWIFT with CBS:
PNB officials did not rout the transactions through CBS, which would have given real-time data
on transacted business. Two officials, one responsible for the updating and the other for the
checking were involved.
No Rotation of Employees:
As per the guidelines issued by the Reserve Bank of India, each employee working in the bank
should be rotated from one position to another in every three years. This practice was not
observed in the Brady Branch of Punjab National Bank.
Assets Seized
● The Enforcement Directorate (ED) seized luxury cars of Nirav Modi (Rolls Royce Ghost, 2
Mercedes Benz GL Class, Porsche, Panamera, Toyota Fortuner, 3 Honda cars and Toyota
Innova.)
● ₹30 Crore in bank account and shows worth ₹13.86 crores.
● Mutual funds and shares worth ₹94.52 crores were frozen which belong to Nirav Modi and
Mehul Choksi.
● Special economic zone property worth ₹1200 crore has been attacked by IT Department and
it belongs to Choksi helmed Gitanjali groups.
● 141 bank accounts and FDs have been attached by the IT department.
● CBI seized Modi’s Alibaug Farmhouse worth ₹32 crore belonging to Nirav modi.
● ₹5100 crore in gold and diamond jewelry has been seized by ED.
● ED Attached 21 Immovable Properties Of Nirav Modi Including Penthouse, Farmhouse
Worth ₹5.23 Crore.
● A Sea Facing Samudra Mahal Flat worth ₹15.45 crore is also attached by ED.
● Solar Power Plant Worth ₹70 Crore In Karjat area has been seized by ED
● Two office properties about ₹80 crore
List of Auditors & Firms:
Note: Audit of Nationalized banks and public sector undertakings are on rotation basis and appointments are made
by Reserve bank of India/ Comptroller and Auditor General of India
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 re-imagined 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 employees 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 Nationalized
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 our endeavor is to provide improved quality of services. We have a multi-disciplinary team
consisting of Chartered Accountants, MBA, Cost Accountants and Company Secretaries. We
have presence in all the regions of the country either through Branch or Associates. We cater to
various professional requirements of our 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 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
Key Points:
● 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 audit office
● According to ICAI 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 ₹407 crore. In March 2014, it zoomed to
₹3458 crore. In March 2017, it raised ₹4302 crore.
General Thoughts:
Auditors say it is difficult to capture such fraudulent transactions in the statutory audit process.
“Yes, there were clear gaps in the entire internal controls, which include audit processes,” says
Rakesh Nangia, managing partner, Nangia & Co. What makes the task more difficult for the
auditors is that the scam was conducted in collusion with several employees. “There is a failure
in the complete chain of responsibility matrix and could not have continued without collusion,”
he says.
According to Reshmi Khurana, managing director, Kroll India, the scam relates to fraudulent
transactions in relation to one client. “Such frauds can only be captured if auditors, whether
internal or statutory auditors, monitor high-value or unusual transactions on a routine basis,” she
says.
About the Chain of Command:
The process seems foolproof. A branch such as Mumbai’s Brady House, which is a
corporate-focused one, is headed by a branch manager who holds the rank of an assistant general
manager. In such branches, a senior official is designated as ‘concurrent auditor’, who tracks all
the transactions of the branch and at the end of the day generates an audit report. This report can
be opened only by the branch manager in a specified room. Both the concurrent auditor and the
manager sign the report and then it goes to the head office.
The auditor reports directly to the head office and nobody can manipulate the auditor’s work. “It
is quite surprising that a few people, including one clerk, could continue issuing LoUs (letters of
understanding) of vast amounts without any checks and balances,” said a banker.
There is another set of auditors called internal auditors. Ideally, they should have caught the
fraud. Even if a SWIFT (Society for Worldwide Interbank Financial Telecommunication) system
sits outside the CBS, it does leave a trail and eventually gets linked up with the CBS through the
nostro account overseas. Any foreign branch audit should have easily picked up the amount
hanging.
There is another kind of audit called statutory audit. This is done by outside auditors who are
highly trained and specialized. However, they do not necessarily visit branches but rely on
internal audit reports to collate the branch-based data.
Finally came the auditors of the Reserve Bank of India. Their job is mainly in the head office.
This auditing is for risk-based supervision and not necessarily for the daily operations of a bank.
Audit Report 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 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.
Our Opinions & How Could the Scam Have Been Prevented
It is true that the two softwares are not linked in this bank. But that could not have created a
blind spot for auditors because the guidance note of the Institute of Chartered Accountants of
India 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. The
internal auditors of the bank, the concurrent auditors of the branch and the statutory auditors of
the bank should have all been checking this every year.
Bank branches dealing with foreign exchange – such as the Punjab National Bank’s Brady House
branch in South Mumbai from where the scam allegedly took place – must get special approvals
by the RBI. 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. 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.
References
● Business Today. (n.d.). Nirav Modi case: What is LoU, CBS, SWIFT? Know these terms to
understand PNB fraud. From Business Today:
https://www.businesstoday.in/latest/economy-politics/story/pnb-fraud-what-is-lou-cbs-swift-
101204-2018-02-15
● Investopedia. (n.d.). How the SWIFT System Works. From Investopedia:
https://www.investopedia.com/articles/personal-finance/050515/how-swift-system-works.asp
● Investopedia. (n.d.). Nostro Account. From Investopedia:
https://www.investopedia.com/terms/n/nostroaccount.asp
● NDTV Profit. (n.d.). What Is An LoU? Five Things To Know. From NDTV:
https://www.ndtv.com/business/what-is-an-lou-letter-of-undertaking-five-things-to-know-181
4314
● https://en.wikipedia.org/wiki/Punjab_National_Bank_Scam
● https://blog.ipleaders.in/detailed-study-pnb-scam/
● https://amity.edu/UserFiles/admaa/6561aPaper%202.pdf
● https://www.business-standard.com/about/what-is-pnb-scam
● https://www.timesnownews.com/business-economy/economy/article/pnb-scam-nirav-modi-m
ehul-choksi-companies-auditors-role-to-be-investigated/201334
● https://economictimes.indiatimes.com/industry/banking/finance/banking/cbi-arrests-pnb-ban
k-internal-auditor-in-2-billion-fraud/articleshow/63114390.cms?from=mdr
● https://www.businesstoday.in/industry/banks/story/pnb-scam-icai-notices-statutory-auditors-b
rady-house-branch-104849-2018-04-15
● https://scroll.in/article/870133/pnbs-audit-committee-with-a-government-representative-kne
w-banks-fraud-checks-were-weak
● https://www.business-standard.com/article/finance/pnb-fraud-how-bank-auditors-failed-to-de
tect-the-scam-in-six-years-118021901425_1.html
● https://www.livemint.com/Industry/eKJsSaj9tJHI3xvx21NOlL/PNB-auditor-conspired-with-
Nirav-Modi-in-2-billion-fraud-s.html
● https://www.rediff.com/business/report/pnb-scam-what-role-did-the-auditors-play/20180219.
htm
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Role of Auditors in Punjab National Bank Scam

  • 1. Role of Auditors in the Punjab National Bank Scam
  • 2. Table of Contents Table of Contents 2 Basic Terms to Know: 3 SWIFT: 3 LOU: 3 CBS: 3 Nostro Account: 3 Introduction 4 About the Bank 4 About the Scam 4 How the scam took place: 5 Reasons why the scam was to be undetected: 6 The Failure of Auditors: 6 Management Failure: 6 Non-Linkage of SWIFT with CBS: 6 No Rotation of Employees: 6 Assets Seized 7 List of Auditors & Firms: 8 SURI & CO. CHARTERED ACCOUNTANT 8 SPMG & Company 8 MKPS & Associates 9 G.S. Mathur & Co. 9 HDSG 9 Role of Auditors 10 Key Points: 10 General Thoughts: 10 About the Chain of Command: 11 Audit Report Submitted 12 Our Opinions & How Could the Scam Have Been Prevented 13 References 14
  • 3. Basic Terms to Know: SWIFT: Society for Worldwide Interbank Financial Telecommunications (SWIFT) is a vast messaging network used by banks and other financial institutions to quickly, accurately, and securely send and receive information and instructions through a standardized system of codes. SWIFT assigns each financial organization a unique code that has either eight characters or 11 characters. (Investopedia, n.d.) LOU: Letter of Undertaking (LOU) is a widely accepted provision of bank guarantees, under which a bank can allow its customer to raise money from another Indian bank's foreign branch in the form of a short term credit. The LOU serves the purpose of a bank guarantee for a bank's customer for making payment to its offshore suppliers in the foreign currency. For raising the LOU, the customer is supposed to pay margin money to the bank that issues the LOU and accordingly, they are granted a credit limit. (NDTV Profit, n.d.) CBS: Core Banking System (CBS) is a system where all branches are inter-connected to ensure that the bank customers - regardless of their home branch - are able to operate their account and transact in any of the member branches located anywhere in the world. After the advent of this system, a customer is no longer a customer of a branch, but a customer of a bank. All the transactions are updated real-time. (Business Today, n.d.) Nostro Account: A nostro account refers to an account that a bank holds in a foreign currency in another bank. ​ ​ Nostro accounts are frequently used to facilitate foreign exchange and trade transactions, with the purpose of simplifying the process of exchanging and trading in foreign currencies. (Investopedia, n.d.)
  • 4. Introduction About the Bank 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. (Wikipedia, n.d.) About the Scam ● The Punjab National Bank scam relates to fraudulent letters of undertaking worth ₹ 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, PNB lodged a FIR with CBI stating that fraudulent LoUs worth Rs Rs 280.7 crore were first issued on 16 January. In the complaint, PNB 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 ₹ 2362 crore in the PNB fraud case.
  • 5. How the scam took place: Nirav modi exported rough stones from foreign countries worth crores. The employees at PNB 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, UCO bank and Allahabad bank by 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 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.
  • 6. Reasons why the scam was to be undetected: The Failure of Auditors: M. K. Sharma, the internal chief auditor for Punjab National Bank’s Brady House Branch, was allegedly responsible for auditing the systems and practices and reporting deficiencies to the zonal audit office. He failed to detect any frauds that took place in PNB Brady House branch, Mumbai. Management Failure: The management of the Punjab National Bank’s Brady House Branch was itself involved in the scam. The names of persons involved (and arrested) were: ➢ Gokul Nath Shetty (Retired Deputy Manager) ➢ Manoj Kharat (S​ ​ ingle Window Operator) ➢ Hemant Bhat (Clerk and Authorized Signatory) ➢ V. Bhechhu Tiwari (Chief Manager - Forex Department) ➢ Yashwant Joshi (Scale II Manager - Forex Department) ➢ Parul Sawant (Scale-I Officer - Handling Exports) Non-Linkage of SWIFT with CBS: PNB officials did not rout the transactions through CBS, which would have given real-time data on transacted business. Two officials, one responsible for the updating and the other for the checking were involved. No Rotation of Employees: As per the guidelines issued by the Reserve Bank of India, each employee working in the bank should be rotated from one position to another in every three years. This practice was not observed in the Brady Branch of Punjab National Bank.
  • 7. Assets Seized ● The Enforcement Directorate (ED) seized luxury cars of Nirav Modi (Rolls Royce Ghost, 2 Mercedes Benz GL Class, Porsche, Panamera, Toyota Fortuner, 3 Honda cars and Toyota Innova.) ● ₹30 Crore in bank account and shows worth ₹13.86 crores. ● Mutual funds and shares worth ₹94.52 crores were frozen which belong to Nirav Modi and Mehul Choksi. ● Special economic zone property worth ₹1200 crore has been attacked by IT Department and it belongs to Choksi helmed Gitanjali groups. ● 141 bank accounts and FDs have been attached by the IT department. ● CBI seized Modi’s Alibaug Farmhouse worth ₹32 crore belonging to Nirav modi. ● ₹5100 crore in gold and diamond jewelry has been seized by ED. ● ED Attached 21 Immovable Properties Of Nirav Modi Including Penthouse, Farmhouse Worth ₹5.23 Crore. ● A Sea Facing Samudra Mahal Flat worth ₹15.45 crore is also attached by ED. ● Solar Power Plant Worth ₹70 Crore In Karjat area has been seized by ED ● Two office properties about ₹80 crore
  • 8. List of Auditors & Firms: Note: Audit of Nationalized banks and public sector undertakings are on rotation basis and appointments are made by Reserve bank of India/ Comptroller and Auditor General of India 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 re-imagined 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 employees 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 Nationalized 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
  • 9. MKPS & Associates It was established in 1952. The firm believes in upholding Excellence in Professional services and our endeavor is to provide improved quality of services. We have a multi-disciplinary team consisting of Chartered Accountants, MBA, Cost Accountants and Company Secretaries. We have presence in all the regions of the country either through Branch or Associates. We cater to various professional requirements of our 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 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.
  • 10. Role of Auditors Key Points: ● 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 audit office ● According to ICAI 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 ₹407 crore. In March 2014, it zoomed to ₹3458 crore. In March 2017, it raised ₹4302 crore. General Thoughts: Auditors say it is difficult to capture such fraudulent transactions in the statutory audit process. “Yes, there were clear gaps in the entire internal controls, which include audit processes,” says Rakesh Nangia, managing partner, Nangia & Co. What makes the task more difficult for the auditors is that the scam was conducted in collusion with several employees. “There is a failure in the complete chain of responsibility matrix and could not have continued without collusion,” he says. According to Reshmi Khurana, managing director, Kroll India, the scam relates to fraudulent transactions in relation to one client. “Such frauds can only be captured if auditors, whether internal or statutory auditors, monitor high-value or unusual transactions on a routine basis,” she says.
  • 11. About the Chain of Command: The process seems foolproof. A branch such as Mumbai’s Brady House, which is a corporate-focused one, is headed by a branch manager who holds the rank of an assistant general manager. In such branches, a senior official is designated as ‘concurrent auditor’, who tracks all the transactions of the branch and at the end of the day generates an audit report. This report can be opened only by the branch manager in a specified room. Both the concurrent auditor and the manager sign the report and then it goes to the head office. The auditor reports directly to the head office and nobody can manipulate the auditor’s work. “It is quite surprising that a few people, including one clerk, could continue issuing LoUs (letters of understanding) of vast amounts without any checks and balances,” said a banker. There is another set of auditors called internal auditors. Ideally, they should have caught the fraud. Even if a SWIFT (Society for Worldwide Interbank Financial Telecommunication) system sits outside the CBS, it does leave a trail and eventually gets linked up with the CBS through the nostro account overseas. Any foreign branch audit should have easily picked up the amount hanging. There is another kind of audit called statutory audit. This is done by outside auditors who are highly trained and specialized. However, they do not necessarily visit branches but rely on internal audit reports to collate the branch-based data. Finally came the auditors of the Reserve Bank of India. Their job is mainly in the head office. This auditing is for risk-based supervision and not necessarily for the daily operations of a bank.
  • 12. Audit Report 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 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.
  • 13. Our Opinions & How Could the Scam Have Been Prevented It is true that the two softwares are not linked in this bank. But that could not have created a blind spot for auditors because the guidance note of the Institute of Chartered Accountants of India 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. The internal auditors of the bank, the concurrent auditors of the branch and the statutory auditors of the bank should have all been checking this every year. Bank branches dealing with foreign exchange – such as the Punjab National Bank’s Brady House branch in South Mumbai from where the scam allegedly took place – must get special approvals by the RBI. 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. 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.
  • 14. References ● Business Today. (n.d.). Nirav Modi case: What is LoU, CBS, SWIFT? Know these terms to understand PNB fraud. From Business Today: https://www.businesstoday.in/latest/economy-politics/story/pnb-fraud-what-is-lou-cbs-swift- 101204-2018-02-15 ● Investopedia. (n.d.). How the SWIFT System Works. From Investopedia: https://www.investopedia.com/articles/personal-finance/050515/how-swift-system-works.asp ● Investopedia. (n.d.). Nostro Account. From Investopedia: https://www.investopedia.com/terms/n/nostroaccount.asp ● NDTV Profit. (n.d.). What Is An LoU? Five Things To Know. From NDTV: https://www.ndtv.com/business/what-is-an-lou-letter-of-undertaking-five-things-to-know-181 4314 ● https://en.wikipedia.org/wiki/Punjab_National_Bank_Scam ● https://blog.ipleaders.in/detailed-study-pnb-scam/ ● https://amity.edu/UserFiles/admaa/6561aPaper%202.pdf ● https://www.business-standard.com/about/what-is-pnb-scam ● https://www.timesnownews.com/business-economy/economy/article/pnb-scam-nirav-modi-m ehul-choksi-companies-auditors-role-to-be-investigated/201334 ● https://economictimes.indiatimes.com/industry/banking/finance/banking/cbi-arrests-pnb-ban k-internal-auditor-in-2-billion-fraud/articleshow/63114390.cms?from=mdr ● https://www.businesstoday.in/industry/banks/story/pnb-scam-icai-notices-statutory-auditors-b rady-house-branch-104849-2018-04-15 ● https://scroll.in/article/870133/pnbs-audit-committee-with-a-government-representative-kne w-banks-fraud-checks-were-weak ● https://www.business-standard.com/article/finance/pnb-fraud-how-bank-auditors-failed-to-de tect-the-scam-in-six-years-118021901425_1.html ● https://www.livemint.com/Industry/eKJsSaj9tJHI3xvx21NOlL/PNB-auditor-conspired-with- Nirav-Modi-in-2-billion-fraud-s.html ● https://www.rediff.com/business/report/pnb-scam-what-role-did-the-auditors-play/20180219. htm