PNB Fraud: Poor Auditing Standards of Indian Banks EXPOSED

The corruption has spread all over the country and this time it has targeted country’s one of the leading nationalized bank, Punjab National Bank. This scam not only has revealed shocking fraudulent transactions, but it has also exposed the poor auditing standards of Indian banks and firms because many irregularities were allowed to happen for seven years in the same bank continuously before getting detected, that too accidentally.

The shocking incident which happened here is the standard of banking auditing. Because normally, banks are not audited by just one team, there are concurrent auditors. Therefore, if something has been missed by one team, the other team should notice that, but in the case of PNB Scam, the mistake was overlooked by the auditing system. This simply raises a question on the safety systems of the banks and the quality of auditing of the banks, that too in the country’s second largest nationalized bank.

Punjab National Bank has now gone through a shocking Rs.11000 crore scandal with some of its officers involved in the fraud and corruption. These staffs helped jewelers Nirav Modi and Mehul Choksi of Gitanjali Gems for issuing fake LoU’s (Letter of Undertaking) since the year 2011 to various banks for funding the diamond merchants.

How Auditors Missed the Transactions?

The scam incident came to light when the officer who was handling the accounts and issuing the LoU’s got retired recently. When the new officer was approached by the Nirav Modi firms for the issuance of LoU without any documents process, as it was happening before, the matter got highlighted.

These sorts of fraud exercises ought to have been caught by the auditors rapidly as there is concurrent audit as well. Yet, for PNB, it guaranteed that its internal core banking system and the international messaging system operated by SWIFT were not coordinated, which led to this fraud.

Industry specialists call attention to that there were chiefly two issues as far as statutory auditors are concerned in this case. According to the standard practice prevalent among most PSU banks, a few auditors across cities are selected. These examiners don’t have visibility of the considerable number of transactions with a specific business and approach information relating to one branch. Additionally, for a large portion of these reviewers, PSU banks are the biggest and sole consumers in many cases well.

This prompts a circumstance where auditors may not be extremely autonomous, according to industry specialists. According to the annual reports of Punjab National Bank, some of the greatest auditors of the bank are R Devendra Kumar & Associates, Chhajed & Doshi, Hem Sandeep 7 Co, Suri & Co, SPMG & Co. In the financial year 2011-12, the auditors were V K Verma & Co, Amit Ray & Co, Mookherjee Biswas & Pathak, Sarda & Pareek, Borkar & Muzumdar, G S Madhava Rao & Co. None of these auditing firms are available independently now for their comments on the incident.

Private sector banks have generally one or two auditors, but the number of auditors in PSU bank runs into hundreds. According to reports, recently a PSU bank saves Rs.35 crore by the deduction in its number of concurrent auditors from 1400 to 30. The big auditing firms of the country charge between Rs.1.5 crore to Rs.5 crore to audit top Indian firms.

Review specialists say that while valuations are subjective a few capabilities in the review report more likely than not been included all the more so since costs of diamonds and gold are effectively accessible and examiners can really go and check if the stock is simply on paper or it’s really with the organization. Aside from this, there could be issues where the auditors did not raise warnings. But normally, red flags should have been raised when the inventory kept increasing, and the main mistake which was done here was no valuation was conducted ever for the inventory, which was not a big deal to conduct.