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  1. 1. KPMG arm named in Reebok India scam chargesheet SUMMARYKPMG India's auditing arm allegedly helped the then top brass of Reebok India to falsify accounts. The Serious Fraud Investigation Office (SFIO), the investigating arm of the corporate affairs ministry, has named KPMG India affiliate and its auditing arm BSR & Co along with the sacked top executives of Reebok India, Subhinder Singh Prem and Vishnu Bhagat, in its chargesheet filed in the court of first class magistrate in Gurgaon. The charges against the auditors include “criminal breach of trust” as they helped the then top management of the firm “to falsify the accounts and financial statements of the company”. The SFIO chargesheet comes about two years after the ministry of corporate affairs ordered an investigation into the Reebok case in May 2012. After the Satyam case in 2009, this is the second major case where an arm of one of the big four audit firms has got involved in a brush with the law. In the Satyam case, the government agencies had named an arm of PricewaterhouseCoopers for abetting the accounting fraud. The chargesheet has also included the company’s statutory auditor, Delhi-based N Narasimhan & Co, for “pervasive failure ... to detect material falsification of financial statements (and) weaknesses in control and consequent fraud perpetrated for years”. A spokesperson for BSR & Co denied the charges to The Indian Express. In response to an e-mail the firm said it was “not the statutory auditors for the years 2008 to 2011 and accordingly, have no statutory reporting obligation in India”. While BSR is an affiliate of KPMG India, in the case of Reebok, it was assigned the audit function of Indian subsidiaries of Adidas Group, including Reebok India by KPMG Germany. KPMG India declined to comment on the issue, while Narasimhan & Co, too, declined comment. According to the chargesheet, a copy of which has been seen by The Indian Express, “BSR has been criminally negligent as an auditor and criminally misled (among others) the public and shareholders, including Adidas AG, and other stakeholders. They have falsely issued clean audit opinions on the financial statements of Reebok India for the years 2008 to 2011”. Reebok India’s former MD Subhinder Singh Prem and chief operating officer Vishnu Bhagat were allegedly involved in a Rs 870-crore fraud. They apparently over-invoiced their channel partners to show higher sales to meet their annual targets. Without sending the goods to these franchisees they would bill them and instead store the goods in “secret” warehouses and reverse the sales later. To finance the operations they also took loans from banks by using fake invoices and raised deposits from high net-worth individuals. The issues came to light when Adidas, which had bought Reebok International, inquired into their Indian operations in 2011. The forensic arm of KPMG India was hired by Adidas to investigate the suspected irregularities.
  2. 2. But the SFIO noted that even this “forensic audit/ review was not adequately designed and supervised. In fact, the forensic audit should have been more in-depth, comprehensive and investigative in nature.... This again points to lack of professional skepticism and due care at an organisational level within KPMG, India and its affiliate auditing arm BSR”. In May 2012, Reebok India’s director (finance), Shahin Padath, had filed a complaint with the Gurgaon Police alleging the fraud. Reebok's ex-MD and COO arrested on fraud charges Reebok India's sacked MD Subhinder Singh and former COO Vishnu Bhagat were on Wednesday arrested, along with three others, for their alleged involvement in a Rs.870 crore fraud in the company. Singh, Prem along with the three others - Sanjay Mishra, Prashant Bhatnagar and Surakshit Bhatt - have been arrested and will be produced on Thursday in court where "we will seek their custody", said Assistant Commissioner of Police Bhupinder Singh, who heads the special investigation team probing the case. Subhinder Singh and Bhat were booked for fraud, criminal conspiracy and other charges under IPC for allegedly siphoning off the sportswear maker company's money by creating ghost distributors across the country and generating forged bills over the last five years. When the alleged scam came to light in March 2012, Singh, who had been made the Managing Director of Adidas India last year as a part of an integration of the businesses of both Adidas and Reebok brands, was dismissed from the company. Bhat's services were terminated too. The company's financial director, Shahim Padath, later lodged a formal complaint against the duo. The economic cell of Gurgaon police conducted a probe and found that Singh and Bhat had allegedly rented four warehouses without informing their seniors and used them to store goods and claimed they were supplied to genuine dealers. They also allegedly siphoned off goods to ghost companies and distributors across the country, claiming they were defective pieces. On the complaint of Shahim, an FIR was lodged against them. Singh and Bhat have denied the charges.
  3. 3. Reebok India: fake sales and secret depots Ernst and Young audit also shows leakages that seem to have benefited various individuals, entities The forensic audit of Reebok India sheds new light on a messy affair that is being investigated by both the Gurgaon Police and the Serious Fraud Investigation Office. New Delhi: A forensic audit ofReebok India Co. has found fake transactions with unauthorized customers, allegedly concocted to exaggerate the company’s revenue and possibly aimed at meeting targets. It also shed new light on a messy affair that is being investigated by both the Gurgaon Police and the Serious Fraud Investigation Office (SFIO), an arm of the ministry of corporate affairs. The audit, conducted by the German arm of Ernst and Young (E&Y), shows transactions between Reebok India and companies owned by Sanjeev Mishra, who ran a staffing services company that supplied contract employees to the shoemaker, among other circuitous and complex transactions. Mint has seen a copy of the audit report. The audit also shows leakages in some transactions that seem to have benefited various individuals or other entities. However, it is silent on the exact gains derived by the main accused. E&Y declined to comment on the matter. Adidas AG acquired Reebok International Ltd, the parent of Reebok India, in 2005. In May this year, Adidas claimed it had uncovered a fraud of the magnitude of Rs.870 crore at the Indian operations of Reebok. Since then, 12 people, either former employees of Reebok India, including its former managing director Shubhinder Singh Prem and former chief operating officer Vishnu Bhagat (the two are the main accused), or associates like Mishra, have been arrested. Prem and Bhagat left the company on 26 March.
  4. 4. Praveen Agarwal, the lawyer representing both Prem and Bhagat, said his clients deny “any findings in the E&Y report” that hold them responsible for any loss to Reebok India. Mishra’s lawyer Harish Bharadwaj declined comment because “the matter is pending in court”. A spokesperson for Reebok India said the exact gains of the two main accused are yet to be assessed. “The falsification of accounts at RIC (Reebok India) will result in a restatement of the prior year financial results of the Adidas Group of €125 million. There has been no change to these previously reported numbers. Due to the poor state of the customer accounts, reconciliations are taking much longer than anticipated. As a result, the exact amount of the restatement cannot yet be determined. The financial gains attributed to the two accused have not yet been fully deciphered,” she said in a mail. In its original complaint to the Gurgaon Police, Adidas offered a break-up of the Rs.870 crore number:Rs.530 crore on account of so-called parallel accounting that inflated sales, which were not passed on to the company; Rs.147 crore in goods invoiced but not dispatched; Rs.63 crore in goods returned and pending inspection; Rs.0.9 crore on account of secret warehouse bills, Rs.14.82 crore in interest lost on a franchisee referral programme; and Rs.98 crore on account of payments to and from customers (dealers and distributors). Agarwal said the Rs.530 crore is a difference in “reconciliation” and “as such, a non-monetary loss to the company”. The audit report backs this. Interestingly, as Mint reported on Monday, the Gurgaon Police has arrived at a number of Rs.11.3 crore, and not Rs.870 crore, after its investigations. To be sure, this could be because the police is “essentially looking at the criminal aspect”, according to an official at SFIO, who did not want to be identified. This person added that his agency is looking at the “accounting aspect” and that the lower estimate by the police does not necessarily absolve the accused. E&Y was appointed by Adidas to conduct the financial audit. Mint couldn’t immediately ascertain the total value assigned by it to the irregular transactions it discovered. Agarwal claimed that the audit firm is being paid Rs.130 crore for its services. Mint couldn’t independently verify this number. According to the E&Y report, around Rs.147.25 crore of goods were “billed but not delivered” and stored in secret warehouses owned by Shivam Enterprises and Oriya Sales, both owned by Mishra.
  5. 5. Reebok India hired the warehouses in October 2009, and between then and June 2012, paid a rent ofRs.1.43 crore. On its books, Reebok showed the goods as having been sold to its dealers and distributors, according to the forensic report—it even had invoices—but it had no intention to deliver them, merely to inflate sales. The company, the report adds, also inflated sales by storing stock returned by dealers and distributors in other designated (read: on the book) warehouses, but simply chose not to account for them for a long time. The forensic audit shows mail trails between employees to the effect. E&Y’s report also shows that Reebok India showed higher sales revenue by effecting retrospective increases in the price of goods already sold to dealers and distributors. This increased both the sales revenue and the accounts receivable (or amount due from dealers and distributors). These retrospective price increases netted the company around Rs.86 crore, according to the report. The firm also seems to have done some circular trading, according to the report, selling goods to be repaired to Mishra’s Shivam Enterprises and Oriya Sales for Rs.35.2 crore, when their value was actually lower by around Rs.14.3 crore. Interestingly, it received only Rs.3.08 crore for these. Some of these goods were further sold to dealers for Rs.3 crore by the two companies, which also sold back the rest to Reebok India through Om Trading, another Mishra-owned company, for Rs.14.4 crore. And Reebok paid Rs.4.1 crore of the Rs.14.4 crore. In effect, according to the report, Reebok received Rs.3.08 crore, while paying Rs.4.1 crore. Mint couldn’t establish how the company accounted for these transactions or whether its books recognized the reduction in stock (since Shivam and Oriya sold some goods) in the final leg. In a similar transaction, Reebok India, the audit shows, also sold defective goods worth Rs.21.5 crore to a company called KK Enterprises as recently as December 2011, but actually moved them to a secret warehouse from where some part was sold to some unauthorized buyers. These sales transactions to the unauthorized buyers were off the books. The remaining goods were booked as sales returns in May without accounting for the goods sold to the unidentified buyers. The Gurgaon Police filed its charge-sheet in the case on 12 November. SFIO will submit its report to the ministry of corporate affairs by 30 November, said the SFIO official quoted above. Prem and Bhagat and the other executives have been in judicial custody since September. They have been booked for falsification of records, diversion of funds, causing loss to the company and wrongful gain.
  6. 6. Gurgaon police record Reebok loss at Rs.11.3 cr The sum is just a fraction of the Rs 870 cr mentioned in a 21 May FIR filed by Adidas The chargesheet says the loss incurred due to “theft through secret warehouses” amounted to Rs.1.87 crore and that the loss on account of fraud through “franchisee referral program” and “falsification of accounts” was Rs.9.42 crore. New Delhi: The extent of wrongdoing in the alleged fraud atReebok’s Indian unit may be much lower than what has been claimed by Adidas AG, the owner of the sportswear maker, going by a chargesheet filed by Gurgaon police in the case. According to the document, which was filed by the police at the Gurgaon district court on 12 November, the total loss incurred by Reebok India on account of alleged financial irregularities is to the tune of Rs.11.3 crore. Mint has reviewed a copy of the chargesheet. The sum is just a fraction of the Rs.870 crore mentioned in a 21 May first information report (FIR), or police complaint, filed by Adidas as the extent of its loss on account of former employees siphoning off funds and creating “ghost distributors” and “secret warehouses”.
  7. 7. The chargesheet says the loss incurred due to “theft through secret warehouses” amounted to Rs.1.87 crore and that the loss on account of fraud through “franchisee referral program” and “falsification of accounts” was Rs.9.42 crore. The police have not been able to ascertain claims on “cheating through fake sales”, and so-called “in-and-out” (a term used in inventory accounting) transactions. The police has also failed to put a figure on the losses due to “overstated accounts receivable”, “maintenance of parallel accounting records” and “fraudulent retrospective price increases”. “As stated earlier, the financial irregularities could result in a re-statement of pre-tax income for the Adidas Group of up to €125 million in 2011 and prior years,” a Reebok India spokesman said in an emailed response to queries from Mint. “Thus, there is no change in the Rs.870 crore figure reported in the FIR,” the spokesman said. “The loss on account of the aforesaid accounting fraud is yet to be fully ascertained by the firm. It would not be appropriate to make any further comment.” Adidas, which acquired Reebok in August 2005, had accused two former executives, former managing director Shubhinder Singh Prem and chief operating officer Vishnu Bhagat, of perpetrating the fraud by siphoning off funds from the firm by creating ghost distributors and generating forged bills over the past five years. The Gurgaon police has arrested 12 former executives, including Prem and Bhagat, on various dates beginning 20 September. They have been booked for falsification of records, diversion of funds, causing loss to the company and wrongful gain. An official of the Serious Fraud Investigation Office (SFIO) said the agency is likely to submit its report on the case to the corporate affairs ministry by 30 November. This official, who did not want to be identified, said the lower estimate made by the police does not necessarily absolve the accused. “The police is looking at the case differently from us. They are essentially looking at the criminal aspect, that is the violation of the criminal procedure code, while we are looking at the accounting aspect,” he said.
  8. 8. Enforcement Directorate has become the fourth agency to probe the purported fraud. New Delhi: The Enforcement Directorate (ED) has begun a money laundering probe into the alleged Rs.870 crore corporate fraud in sports apparel company Reebok India. With the registration of this new case, under the provisions of the Prevention of Money Laundering Act (PMLA), ED has become the fourth agency to probe the purported fraud. Earlier, the income-tax department under the finance ministry, the Serious Fraud Investigation Office (SFIO) under the corporate affairs ministry and the Economic Offences Wing of Gurgaon police had probed against the firm and its officials based here. ED has begun scrutinizing the financial documents and bank statements of the firm and its businesses in India, according to the people close to the development, and it is in touch with other agencies with regard to the probe. “Enforcement Directorate had through a notice requested Reebok India company to provide certain information. The company has and will continue to extend full cooperation to all investigating authorities involved in this matter,” Reebok India said in a statement. Investigators, after their probe till now, have hinted to an alleged connivance of the company officials and its employees. In the much-publicized criminal complaint filed at the Gurgaon police’s Economic Offence Wing in May, the company had alleged that its former managing director Subhinder Singh Prem and chief
  9. 9. operating officer Vishnu Bhagat were involved in the Rs.870-crore fraud by indulging in “criminal conspiracy” and “fraudulent” practices over a period of time. In their probe till now, the agencies have also detected that some of the officials of the company could have been involved in the inflation of bills and over-valuation of goods of the firm. ED may also attach the bank accounts and properties of individuals involved in the case after identifying the “proceeds of crime”. ED, meanwhile, is also probing alleged violations of foreign exchange rules by the company since 2006 and has asked the firm to provide Reserve Bank of India clearances it received in this regard. NSEL case: Rs.50 crore assets of agro firm attached by ED ED has identified the assets of PD Agro after it searched few premises and went through the records of the EOW PD Agro, the third largest borrower of NSEL which traded on the exchange on behalf of Dunar Foods Ltd., Dulisons Cereals and Dulisons Foods, has a payment obligation of Rs637.49 crore.
  10. 10. New Delhi: The Enforcement Directorate (ED) has attached properties worth Rs.50 crore of a defaulting firm in connection with its money laundering probe in the National Spot Exchange Ltd (NSEL) case. The latest attachment order was issued by the central probe agency against Ms PD Agroprocessors Pvt. Ltd, one the defaulters at the bourse. The agency had identified the assets and immovable properties of the firm after it searched few premises and went through the records of the Mumbai Economic Offences Wing (EOW) prepared in this regard, sources said. PD Agro, the third largest borrower of NSEL which traded on the exchange on behalf of Dunar Foods Ltd., Dulisons Cereals and Dulisons Foods, has a payment obligation of Rs.637.49 crore. The ED had registered a case under the Prevention of Money Laundering Act (PMLA) last year to probe laundering charges against the officials of the stock exchange and other individuals. ED has earlier attached properties worth Rs.175 crore under the same laws against various borrower firms. NSEL, promoted by the Jignesh Shah-headed Financial Technologies (India) Ltd (FTIL), was engulfed in a crisis after trading on the platform was suspended on 31 July last year, raising concerns about possible default ofRs.5,600 crore.