Scathing Auditor’s Note Flags ‘Deep-Rooted Conspiracy’ At Hindustan Copper

Hindustan Copper Ltd. investors are worried. The stock is down over 40 percent so far this year amid fears of alleged financial irregularities.

In the company’s 2018 annual report, independent auditors raised concerns over balance sheet disclosures, overstatement of mine development expenditure and compliance relating to the minimum number of independent directors on board, etc.

The auditors also alleged Hindustan Copper of a “deep-rooted conspiracy” to drain its valuable resources for the benefit of others, saying the company was unable to carry out operations in an optimum manner despite the Taloja Copper unit having spare capacities.

But both the Comptroller & Auditor General and the company rebuffed the claims.

Shares of Hindustan Copper have declined over 41 percent so far this year, making it the second-worst performer on the Nifty Metal Index, according to Bloomberg data.

Here are some of the observations made by the independent auditors in the company’s annual report:

• Revenue from operations and raw material consumption overstated by Rs 393.97 crore and Rs 389.50 crore, respectively.
• The company overstated the mine development expenditure by Rs 135.70 crore relating to the Malanjkhand Copper Project and the Khetri Copper Complex appearing as non-current assets.
• The company’s capital work in progress has been overstated by at least Rs 25.57 crore.
• The value of inventory has been overstated by Rs 374.08 crore.
• Fixed assets overstated by Rs 7.59 crore and assets awaiting disposals understated.
• Non-current and current tax assets/non-current tax liabilities understated and overstated, respectively, by Rs 46.40 crore.
• Apparent anomalies in the charge of depreciation not been explained.
• Accounting standards have not been complied in many cases.

The management in a 35-page explanation refuted these claims made by the auditors. The accounting policy adopted by the company is being consistently followed for calculation of amortisation and other accounting matters, it said. The company, according to the management, provided the verification report of the stock to the auditors.

Below are some of the opinions made by the independent auditors on the state of affairs at Hindustan Copper as of March 31, 2018.

• Lack of independent directors: The company doesn’t comply with the minimum requirement of having 50 percent independent directors on board. Three posts of independent directors were lying vacant as of March 2018.
• Fails to acknowledge uncertainty related to various lawsuits as debt: The company doesn’t acknowledge uncertainty related to various lawsuits worth Rs 517.65 crore in debt and treated them as contingent liabilities.
• Lack of required disclosures related to current assets & current liabilities: Sundry creditors, claims recoverable, loan and advances not confirmed in number of cases.
• Lack of proper records maintained for fixed assets: Fixed asset registrar doesn’t include details like location, identification by survey members quantity, quantity and impairment particulars.

“The new auditor of FY18 raised concerns about serious irregularities. Their opinions and management rebuttal seemed poles apart,” Aveek Mitra, founder and chief executive officer at Aveksat Financial Advisory, said. “Hardly seen so many observations in any annual report made by auditor.” Mitra termed the whole fiasco as an “unprecedented slugfest in annual report”.

CAG Comments On Auditor’s Report

The CAG conducted a supplementary audit without access to working papers of independent auditors and negated part of their report findings.

Following are the observations:

• Fixed assets of Gujarat copper project and regional offices sales east have been verified.
• Auditors haven’t submitted any documentary evidences with respect to their claim of a deep-rooted conspiracy.
• Auditors contradict their own observations with respect to compliance to accounting standards by the company.

BloombergQuint awaits the company’s response to emailed queries.