Financial Times

KPMG finds PWC audits faulty
Informatics accuses IFS of siphoning profits
By Akhry Ameer
Informatics (Pvt) Ltd has taken its joint venture partner IFS Sri Lanka to court for allegedly siphoning off profits in a case where auditors PriceWaterhouseCoopers (PWC) has been found to have approved accounts that deviated from accepted accounting practices.

The Commercial High Court last week called for written submissions following a delay by IFS Sri Lanka (Pvt) Ltd on five occasions to respond to a KPMG investigative audit report ordered by court.

The KPMG report found the company's auditors PWC of inappropriately approving annual accounts in violation of the shareholders' agreement and denying its Sri Lankan joint venture partner Informatics (Pvt) Ltd. of due profits. The audit affirmed the allegation by local partner Informatics that IFS had, against their agreement, set up a new subsidiary IFS R&D (Sri Lanka) and have been transferring assets from the original local joint venture at cost thus denying Informatics of its share of profits. The report said the establishment of the subsidiary within the same premises caused the original company to advance funds to the subsidiary at no cost for common overheads such as water, electricity, network systems and security.

KPMG in its report told court that the wealth creation objective set out in the Memorandum of Association has been violated by IFS converting its subsidiary to a cost centre. The court having heard the case appointed KPMG Ford, Rhodes, Thornton and Co. to conduct an investigative audit of the accounts of IFS Sri Lanka for a period of one year from January 1 to December 31, 2001.

KPMG further reported to court that IFS would have made a substantial after tax profit even at rates much lower than current market rates as opposed to the current No Profit/No Loss situation portrayed by IFS.

Further, the investigative audit found the company to be not making any profits, due to a policy of equating expenditure to the revenue, implying the entity to be a not-for-profit organization. KPMG also said the management and staff of IFS had refused to sign and authenticate documents and statements provided by them.

The petitioner, Informatics, a group with diversified businesses in the Sri Lankan IT sector, amongst other pleadings said its partner had never held board meetings to seek its approval on investment decisions, abided by their shareholder's agreement, nor responded to any of its communications.

The key investment decisions on which Informatics have been denied their voice include enhanced loans for a sum of Rs. 200 million from DFCC during the period 1998 to 2000. The local partner has further alleged that IFS has leveraged its name, recognition and strength within Sri Lanka to obtain resources including human and knowledge capital.

Informatics and IFS entered into a joint venture in 1997 with the objective of developing, exporting and selling locally, computer software, programmes and applications.

In other developments IFS recently announced to the media the establishment of its own customized facility at Wellawatte valued at over Rs. 100 million and housing nearly 400 employees.

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