ED finds gaps in State Bank of India audit of grounded Jet Airways

The bank closed the forensic audit in April as it found the cash-strapped airline’s response adequate on the findings
The Enforcement Directorate (ED) has raised objections against the State Bank of India-commissioned audit of Jet Airways books, as its own probe findings in the case are significantly different .

SBI, which led the lenders’ consortium for Jet, had appointed accounting firm EY last year to do an audit of the airline amid fund diversion allegations. The bank closed the forensic audit in April as it found the cash-strapped airline’s response adequate on the findings.

ED is of the view that the EY findings did not talk about money trails, fund diversion, incorporation of multiple shell firms which were used to divert funds, variance in lease rentals and high selling and distribution expenses by Jet. Also, the response furnished by the airline was found to be evasive, according to sources in the know.

The probe agency is now planning to conduct an independent audit on Jet. “We have observed certain deficiencies in the findings and even in the responses submitted by Jet on various issues to the auditors,’’ said an ED official. He added that the matter was taken up with the lender last week.

EY had sought Jet Airways’ reply on 28 queries based on their findings. Of that, ED is not satisfied with the airline reply to at least half a dozen queries. Business Standard has reviewed the audit findings and the Jet submission on the queries.

The loan provisioning of JetLite, a wholly owned subsidiary, is among the contentious issues under scrutiny. JetLite was given a loan of Rs 3,353 crore over four years in spite of Jet recording losses during FY2014. Jet’s response was that the provisions were mainly due to the continued losses of JetLite and its ability to turn around given the size of its operations. Such provisions have been audited by the statutory auditors of the company and placed before the audit committee and the board for approval.

On fraudulent billing to the tune of Rs 140.4 crore for JP Miles, Jet had said it was observed by the internal audit team and rectified through a credit note.

The audit report also found that invoices raised on Jet Privilege were not verified, resulting in an excess billing. Even on this , Jet said that necessary action had been initiated by the audit committee.

Another query was raised on the Rs 155 crore estimated valuation of Jet Privilege Private Ltd (JPPL) in 2013. The purchase consideration agreed on for JPPL was Rs 1,216 crore, much higher than the 2013 valuation. Jet explained that there’s some gap in the understanding of the forensic audit team in the JPPL valuation.

With respect to variance in the monthly rental paid for the same aircraft model, the findings say that for the A330-300 aircraft model, the monthly lease rental for MSN 1351 was $720,000 while for MSN 1361 it was $820,000, though both were delivered in December 2012. Jet said it had signed a lease agreement with GE Capital Aviation Services (Gecas) that under no circumstances the airline’s rental exposure would increase. Therefore, the additional rental paid to the new lessor was adjusted out of the rental payable to Gecas. There was no adverse impact to Jet due to the change in the lease amounts, the airline said.

Similarly on other aircraft too, rentals were seen as high. To that, Jet said lease rentals depend on a variety of factors such as demands for a particular type of aircraft, its supply, prevailing interest rates and so on.

The EY audit also raised queries on fuel expenses, which were increased from 25 to 30 per cent between 2016 and 2018. In the same period, fuel expenses of other airlines remained stable. Jet said this was due to an increase in consumption and the average fuel rate.

The auditor also questioned why there was no authority matrix to ascertain the approval structure within the company. Board resolution was only for four out of 12 aircraft lease transaction. The company countered that the delegation of financial matrix was in place and that all the acquisition were approved by board.

Jet and its promoter Goyal have been under the ED scrutiny for alleged diversion of funds to the tune of Rs 8,000 crore and also for violation of foreign exchange regulations during the signing of a $150-million deal with strategic partner Etihad Airways in 2014 for a loyalty programme business. The ED probe has revealed that Goyal had created 19 shell companies to execute ‘’colourable transactions’’. The probe also found several fictitious expenses and ‘’shady’’ aircraft lease deals.

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