Law enforcement agencies looking into the alleged financial irregularities at the Indian arm of Adidas AG’s Reebok unit are set to widen their probe to include audit firm KPMG India.

Maheshwar Dayal, deputy commissioner of police, Gurgaon (east), and a corporate affairs ministry official with direct knowledge of the matter, independently confirmed the development. The second official declined to be identified.

The ministry official said the forensics arm of KPMG, Adidas’ global auditor, was hired by the company in March 2010 to secretly investigate suspected irregularities at Reebok India. Around that time, Reebok India was getting integrated with local unit of Adidas. 

Adidas bought Reebok International Ltd in August 2005 for $3.8 billion but the merger of their Indian operations was completed only in 2011. KPMG had submitted its final report in June 2011.

Gurgaon police will also question Reebok India’s internal auditors and executives of the sportswear company in its accounting, sales and inventory teams, Dayal said. “We will begin taking statements of company executives within this week.”

The special investigation team looking into the case includes an official of the economic offences wing of the Haryana state police.

On Monday, the corporate affairs ministry asked the Serious Fraud Investigation Office (SFIO) as well to investigate the matter. The two investigations—by Gurgaon police and SFIO—will progress parallelly, officials said. The ministry official cited earlier said SFIO will primarily look into the legal aspects of the case and close its investigation in four months.

The move followed a scrutiny of Reebok India’s accounts by the Registrar of Companies (RoC). In its report, RoC stated that Reebok India was not fully cooperating with it and not furnishing the required documents, the official said.

SFIO and RoC come under the corporate affairs ministry.

The case unravelled as German sportswear maker Adidas, which has bought Reebok, accused two of its former top executives in India of a Rs. 870 crore fraud. The company filed a first information report (FIR) with Gurgaon police on 21 May accusing its former India managing director Subhinder Singh Prem and ex-chief operating officer Vishnu Bhagat of indulging in “criminal conspiracy” and “fraudulent” practices over a period of time.

The ministry official cited above said the KPMG probe had cleared the two former company officials. Financial website moneycontrol.com had first reported this on 29 May.

A spokesperson for the audit firm said in an emailed response that “KPMG India are not the statutory auditors of Adidas/Reebok in India,” and declined to comment further.

Reebok India’s books are audited by N. Narasimhan and Co. The auditor could not be immediately reached for a comment.

Prem, speaking over the phone, said the KPMG report is a part of a legal suit he has filed against Adidas. Prem claimed that all the cases against him were part of a “conspiracy” by Adidas. The “secret” warehouses mentioned in Adidas’ FIR were “on the company books” and were “temporary” in nature, he said.

The FIR had said Prem and Bhagat were operating four “secret” warehouses “to keep clandestinely diverted and stolen stocks” of the company.

An executive of the Institute of Chartered Accountants of India said the apex body will investigate N. Narasimhan and Co. “to the extent that they used information provided by the company.”

On Saturday, a Gurgaon court rejected anticipatory bail pleas filed by Prem and Bhagat.

Phone calls and text messages sent to Bhagat on Thursday remained unanswered.

An Adidas spokesman said the company “is cooperating with law enforcement agencies.” He declined to comment any further on the matter. (LiveMint)