After issues between Lilliput founder Sanjeev Narula and PE
investors came to light, the ministry of corporate affairs is looking into the role of Ernst and Young (E&Y) and its member firms to see whether there was a case of conflict of interest. S R Batliboi & Co, an E&Y member firm was Lilliput’s external auditor till last month. The Batliboi panel resigned end-September after Lilliput’s board rejected the financial statements for FY’11 over allegations of financial mismanagement. Prior to that in 2010, when Lilliput was planning to raise capital from PE investors, it had mandated E&Y as the strategic advisor for the stake sale.
E&Y also looked into the accounts and finances of Lilliput. Experts feel, a conflict of interest could arise when the same firm does both advisory work and auditing. Moreover, an E&Y member firm was also the external auditor of Lilliput, responsible for inspecting the company’s accounts. Though E&Y did both the advisory and vendor diligence, it was only a preliminary report that only compiled different financial data of the company in one place and it was not an exhaustive ‘forensic diligence report.’ Apart from this, the PE investors had brought in their own independent diligence teams and had roped in several other auditors, including KPMG, to help carry out a detailed diligence on their own.
Though it is up to the corporate affairs ministry to take a call on the matter, a recent report on Operation of Multinational Network Accounting Firms in India by ICAI, the accounting standard setting body points out several instances where India-registered audit firms were found to be sharing resources including offices and addresses with their MNC network partners. ICAI wants the RBI, the ministry of corporate affairs and other relevant ministries to have a strict watch on such practices.
Meanwhile, the two PE investors of Lilliput have withdrawn their support for the proposed Rs 850 crores IPO plans of the company. Six directors — including four independent ones — have resigned from Lilliput’s board. Narula has now dragged these investors to court, claiming that the PE players want to have a control and ownership. As Lilliput’s promoter, Narula owns a 55 per cent stake in the company with the PE investors holding the rest.