INTRODUCTION OF THE AUDIT FIRM

Over the past 150 years, several ancestor firms merged to form EY, the earliest of which was
founded in England in 1849 as Harding & Pullein.
Alwin C. Ernst and his brother Theodore Ernst founded the company Ernst & Ernst in
Cleveland, Ohio, in 1903. An accountant from Scotland named Arthur Young founded Arthur
Young & Co. in Chicago in 1906. These two American companies began to collaborate with
renowned British companies in 1924: Young with Broads Paterson & Co. and Ernst with the
above-mentioned Whinney Smith & Whinney. The Anglo-American partnership Ernst &
Whinney, at the time the fourth-largest accounting firm in the world, was born in 1979 from
the second of these two mergers.

19 In 1989 Ernst & Whitney merged with Arthur Young of New York as Ernst & Young.

89
In October 1997, Ernst & Young announced plans to merge its global practices with professional
19 services network KPMG, to create the largest professional services organization in the world.
97
These plans were soon abandoned in February 1998, due to several factors ranging from client
19 opposition, antitrust issues, cost problems, and the anticipated difficulty of merging the two
diverse firms and cultures.
98
In 2002, Ernst & Young serviced a large chunk of the clients previously working with Arthur
20 Andersen after their downfall in connection with the Enron scandal, although it did not engage
02 with any new Arthur Anderson clients from the United Kingdom, China, or the Netherlands.

20 In 2010, Ernst & Young acquired Terco, the Brazilian member firm of Grant Thornton.
10
In 2013, the firm officially changed its brand from Ernst & Young to EY, and christened the
20 accompanying tagline: "Building a better working world".
13
In 2014, EY merged with global strategy consulting firm The Parthenon Group, gaining 350
20 consultants in its then-Transaction Advisory Services practice.
14
In 2017 EY announced it was opening an executive support center in Tucson, AZ, creating 125
20 new jobs.
17

1
 ABOUT ABG SHIPYARD

The ABG Group of companies, which has a variety of commercial interests, includes ABG
Shipyard Ltd. Its headquarters are in Mumbai, where it was founded in 1985. In Gujarat, it
operates shipyards in Surat and Dahej. Following its purchase of Western India Shipyard
Limited in October 2010, it now runs the biggest ship repair facility in India out of Goa.
ABG grew to be one of the biggest private shipbuilding firms in India, able to produce boats
up to 20 tonnes in weight. An E&Y forensic audit conducted in January 2019 found that
ABG had defrauded a 28-member consortium of bankers out of Rs 22000 crores. In response,
State Bank of India requested the CBI launched an investigation in November 2019.
The CBI requested that the bank conduct an internal investigation to rule out any involvement
by bank insiders, which was done. Following this, SBI filed a new complaint in September
2020 asking for an investigation into the role of public employees and other people in the
fraud. A lookout notice was published in February 2022 against Rishi Agarwal, the former
chairman of the ABG, and other parties involved in the case.

WHAT WAS THE SCAM ABOUT?

The company reportedly took a big hit from the financial crash of 2007-08 and by 2012, its
coffers were drained. The crash led to the company taking massive loans from several banks.
However, it diverted this cash to its overseas subsidiaries and even transferred money to
several offshore parties.

At the crux of the scam is a web of transactions made by the shipping firm. The money
loaned by ABG Shipyard was used to repay loans and pay for expenses of ABG Group of
Companies and for letters of credit. This money was used to purchase properties linked from
funds provided by ABG Shipyard.

The main charges are diversion of bank funds to group companies and the purchase of assets
by related parties using bank funds.

The company owed a total of Rs 22,842 crore. Out of this amount, it owes ICICI (which was
leading the consortium) Rs 7,089 crore, SBI Rs 2,925 crore, IDBI Bank Rs 3,639 crore, Bank
of Baroda Rs 1,614 crore, Punjab National Bank Rs 1,244 crore, Exim Bank Rs 1,327, Indian
Overseas Bank Rs 1,244 crore, and Bank of India Rs 719 crore. The funds were used for
purposes other than for which they were released by banks.

The fraud was spread over a period of six years.

2
 FORENSIC AUDIT BY ERNST & YOUNG LLP

A forensic audit was started as a result of the lenders' decision in the Joint Lenders Meeting
on April 10, 2018, in accordance with a policy in place since 2014 of red-flagged suspect
accounts, commissioning forensic audits by impaneled forensic auditors.
Ernst & Young LLP was chosen as the forensic auditor. As is standard procedure, these
forensic audits begin roughly three to four years before the date of the NPA declaration,
which in this case was 2016.
Therefore, the period from 2012 to 2017 is covered by the forensic audit of ABG Shipyard
Ltd. E&Y submitted its audit report in January 2019.
The audit reveals that fraud was committed "through misappropriation, criminal breach of
trust, and diversion of funds, with the objective of obtaining illegal gain at the expense of the
bank's funds."
From 28 banks, ABG Shipyard primarily obtained three different types of loans. After being
diverted through 98 sister concern companies, the funds obtained through these loans were
primarily used to build personal assets.
Ledger analysis revealed that money was being moved between ABG Group companies.
ABG Shipyard had invested $43.5 million in ABG Singapore preference shares. Loans taken
out from ABG Shipyard and foreign investments made by ABG Singapore were disclosed in
the financial statements of the company for 2010 and 2011. It is believed that ABG Singapore
received payments from ABG Shipyard in order to deceive money from the bank.
Additionally, it has been claimed that ABG Shipyard Singapore's security deposits were used
to purchase real estate. The forensic report also revealed that on March 31, 2016, ABG
Shipyard passed a joint venture entry that resulted in payments being made to related parties,
including Rs 603 crore to One Ocean Shipping and Rs 812 crore to ABG Engineering and
Construction.
The audit also questions investments through an overseas subsidiary and indicated that
properties had been purchased by related parties with funds provided by ABG Shipyard but
the assets purchased were never part of the fixed assets in the books of the company. Reports
suggest that the money borrowed from banks was used to repay loans and pay for other
expenses of group companies.

3
 MAIN ALLEGATIONS AGAINST ABG SHIPYARD

1. SBI in its complaint alleged that ABG Shipyard routed around Rs 1,415 crore through
various vendors and group companies to repay its own dues
2. ABG Shipyard invested money in its overseas arm ABG Singapore, which was then
eventually completely siphoned off the system.
3. ABG Shipyard transferred money worth Rs 83 crore to seven different related
companies and then this money was used to buy properties, but it never showed up as
the company's fixed assets.
4. More than 50 % of the customer receipts were received in accounts outside the Trust
and Retention Account, which is a breach of the restructuring scheme at ABG
Shipyard. SBI alleged that the company, whose account became a Non - Performing
Asset (NPA) in 2013, violated the terms of its arrangement for Corporate Debt
Restructuring (CDR) which mentioned that " all cash inflows should be routed
through the trust and retention account. "

MY OPINION

The ABG Shipyard scam was an absolute example of corporate governance failure. External
auditors play a key role in the corporate governance framework. They conduct one of the
most important corporate governance checks that help to monitor management’s activities.
In my opinion, the biggest problem with this scam was the delay in determining it. It came to
light only after the forensic audit was done.
According to me, there should certain checks that should be in place in order to keep a check
on companies that are taking huge amounts of loans. If these checks would have been in
place the banks could have known earlier that the loan money was being siphoned by ABG
Shipyard.
Also, I believe that these financial scams should be dealt with in a fast-track manner as the
amounts involved in these kinds of scams are huge.
Additionally tighter due diligence should also be in place.
If I were at the Auditor’s place, I would have had quite a similar strategy. I would aim at
investigating all the relevant and available evidence. However, I would have brainstormed
about how and where the financial statements may be susceptible to material misstatement
due to fraud, how assets could be misappropriated, and known external and internal factors
that affect the entity and that may provide the opportunity for fraud to be perpetrated. I would
focus on developing a strong base for my audit so that people do not question the credibility
of the audit later.

4
 REFERENCES

 https://timesofindia.indiatimes.com/business/india-business/explained-what-the-sbi-
abg-shipyard-rs-22892-crore-controversy-is-all-about/articleshow/89607587.cms
 https://theprint.in/theprint-essential/5-years-28-banks-rs-23000-cr-debt-how-abg-
shipyard-pulled-off-indias-biggest-bank-fraud/831696/
 https://www.businesstoday.in/latest/economy/story/cbi-on-how-the-abg-shipyard-
fraud-unfolded-322759-2022-02-16
 https://en.wikipedia.org/wiki/ABG_Shipyard
 https://en.wikipedia.org/wiki/Ernst_%26_Young