Auditors at NMC Health warned of serious problems in the verification of bank balances a year before the hospital operator collapsed in a suspected fraud involving more than $4bn in undeclared debt. 

A review by NMC’s auditors at EY found that Bank of Baroda, one of India’s largest banks, had confused accounts belonging to the FTSE 100 company with those held by its founder BR Shetty, according to documents seen by the Financial Times and people familiar with the matter.

Initially, EY feared that almost Dh1bn ($272m) of loans and overdraft balances had been omitted from NMC Health’s accounts before the Bank of Baroda clarified that the debt was owed by Mr Shetty, according to an audit memo.

The discrepancy — which was raised ahead of an NMC audit committee meeting in March 2019 — pointed to serious internal control issues in the company’s dealings with banks.

The bank accounts were reconciled and EY signed off NMC’s accounts after alerting the company’s audit committee to control deficiencies in respect of bank balances that needed to be addressed as a “high priority”.

Just days before EY signed off the accounts, Bank of Baroda scrambled to disentangle inconsistencies in bank balance certificates for NMC Healthcare LLC, NMC’s operating subsidiary in its main market of the UAE, according to emails reviewed by the Financial Times.

In discussions with NMC management, representatives of the bank and the company’s audit committee, EY was told that the discrepancy was due to the bank having “incorrectly tagged” a number of bank accounts. Those accounts, EY was informed, were held by NMC’s founder BR Shetty in his personal capacity, but had been erroneously tagged under the name of NMC Healthcare LLC, the memo said. 

The head of audit at a rival firm to EY said the documents showed that “an opportunity was missed” to uncover far larger undisclosed debts a year before the collapse. “The relationship with the bank and Shetty was so close that the bank couldn’t tell the difference between the accounts of the company and his private accounts, which is a huge red flag,” he said.

“The administrative error gave a clue,” he said. “It was escalated to the senior team at EY who escalated it to the board of NMC, but the opportunity to capture it was clearly missed.”

The tagging issue was discussed further in a June 2019 audit committee meeting, according to a person familiar with the audit process. It was described as “an issue for the bank”, but it was noted that the company ought to have been able to resolve the discrepancy ahead of the audit process. 

In its audit memo, EY called on NMC to “strengthen its internal control process in dealing with banks”. It also suggested management ought to “periodically obtain independent confirmations from all banks” to ensure bank balances are reflected in the books, as well as work with Bank of Baroda to ensure all tagging relating to NMC was correct. 

Asked whether NMC had followed up on EY’s recommendations, NMC declined to comment in light of its ongoing investigation into the alleged fraud which led to the collapse of NMC.

NMC’s rapid implosion was sparked by a highly critical report from short seller Muddy Waters which questioned the veracity of NMC’s accounts in December 2019. NMC in late February this year fired its chief executive Prasanth Manghat, while founder BR Shetty stepped down from the board of directors as the company revealed undeclared pledges and billions in off-balance sheet debt. 

This May, the Financial Reporting Council announced an investigation into EY, which said it would co-operate with the probe. Muddy Waters had previously raised concerns over the Big Four auditor’s independence, noting that NMC’s board included former EY executives.

EY declined to comment on whether it had conducted any further checks on the bank balances and tagging issues raised during the audit of NMC Healthcare LLC.

BR Shetty has had a longstanding banking relationship with Bank of Baroda, one of India’s largest banks. 

A decade ago Bank of Baroda helped Mr Shetty refinance NMC after it faced a severe cash crunch, as other banks withdrew credit lines. 

In May Bank of Baroda obtained a freezing order over Mr Shetty’s assets in India as part of a legal claim in which it is seeking to recover outstanding loans worth $250m. 

According to court filings in India, BR Shetty was a guarantor on a number of loans from Bank of Baroda to NMC and other entities he founded.

The Indian entrepreneur, who founded NMC in 1974, has blamed unnamed members of the company’s current and former management team for the alleged fraud, saying his own investigation had found evidence of fraudulent loans and personal guarantees obtained by forging his signature.

A representative for Mr Shetty declined to comment. Bank of Baroda did not respond to a request for comment.