Thursday, June 25, 2009

Accounts manipulated (Auditor’s even not questioned)


A day after Nepal Rastra Bank (NRB) decided to liquidate Nepal Development Bank, another financial institution has landed in trouble for trying to cook up its balance sheets.

World Merchant Banking and Finance Limited, a finance company, initially thought accounts manipulation would help it hide its bad loans, but this immoral act has proved self-defeating and causing a long-term damage on the company.

The entire saga began in December 2002 when a company named Eastern Suppliers approached the finance company for a loan of nine million rupees to supply coal to Udaypur Cement Factory. The amount was given in two installments of two and seven million rupees of which Rs 1.83 million has been recovered. But when Eastern Suppliers deferred payment after repaying Rs 1.83 million, the finance company became suspicious and contacted Udaypur Cement Factory.

To the surprise, Udaypur Cement told that the tender for supplying the coal was scrapped after Eastern Suppliers was found delivering inferior quality of coal. This meant the money that the finance company had lent to the company was at risk. This sent alarm bells in World Merchant as the finance company established a year ago was on the verge of running in loss in the very first year of its operation. Fearing this would tarnish the image of the company; the evil bankers formed an unholy alliance with the borrowers and created a new loan portfolio but transferred the same ´troubled´ loan amount in the account created in another person´s name.

In other words, the finance company´s balance sheet showed that the amount owed by borrowers was paid back and new loans were issued to new applicants. "But, in fact, the finance company was, only transferring the liability from one person to another, without recovering a single penny from the original borrower," said a high ranking official of World Merchant, requesting anonymity. At that time Ranjit Koirala was the CEO of the finance company, who currently lives in the US.

This illegal practice of transferring the ´troubled´ loan into a new person´s name continued for five years till 2007, when borrowers started asking the finance company to release some of the land held as collateral by the finance company. "To coax the management the borrowers paid back Rs 700,000 of the loan amount. But we did not agree," said the source. Then subsequently, the borrowers started claiming they did not owe any money to the finance company and it had failed to deduct the installment amount that borrowers had paid over the years, which, the finance company calls a "total lie." "We challenge the borrowers to show cash receipt if they had truly repaid the loan amount," said the source.

Then the matter went to the police and in January 2008, it asked the finance company to submit all the documents involved in the loan transaction. Then the central bank became wary of malpractices going in the financial institution and in April 2008 it warned World Merchant to discontinue the illegal practice of transferring liability of loan amount to new persons.

Soon after this, the finance company listed the main borrower, Rakesh Raj Sharma Dhungel of Biratnagar and eight other guarantors, as willful defaulters. According to the finance company, the borrowers owe Rs 14.56 million, including principal and interest, of which Rs 10.59 million can be recovered through foreclosures. Today the management of the finance company acknowledges that it "made a mistake by establishing partnership with people having bad intentions." "Moreover, we made a mistake by not making public statement on what went wrong at the finance company. We were worried about losing our reputation," the source said. "But the damage has already been done."

The auditors of the world merchant bank should be questioned as they are the one who certified the annual report having material misstatement. As ICAI in India initiated an inquiry against auditors of PWC in satyam fraud case. I would be time for ICAN to take some action against the auditors who are not taking there profession seriously.

On June 14 this year, Binit Mani Upadhyaya, CEO of the finance company, was arrested after borrowers lodged a complaint at the Commission for the Investigation of Abuse of Authority. Since then depositors have withdrawn around Rs 400 million from the finance company. "But we are not facing cash crunch as the central bank is indirectly pumping money into the financial institution," the source said. The company is trapped in the mess that it had engineered itself.