New Delhi: A forensic audit of Reebok 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.
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.
Reebok India hired the warehouses in October 2009, and between then and June 2012, paid a rent of Rs.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.