Turmoil At Byju's: What Can The New Auditor Do That Deloitte Couldn't?
BDO-member firm agreeing to sign up Byju's as an audit client is a "serious concern", experts say.
Plummeting valuation, unhappy investors, worried workforce—India's poster boy for the edtech sector Byju's is in serious trouble.
Amid all this came the resignation of Byju's statutory auditor Deloitte who has said that financial statements for FY22 are long delayed. There's been no communication from the management on the resolution of the audit report modifications for FY21. And that the status of audit-readiness, underlying books and records for FY22 remains unclear.
Soon after, Byju's announced the appointment of BDO-member firm MSKA & Associates as its statutory auditor for the next five years.
BQ Prime spoke with Amarjit Chopra, former chairman at the Institute of Chartered Accountants of India; and Santhanakrishnan S., managing partner at accounting firm PKF Sridhar & Santhanam, on whether Deloitte had no other option; where would MSKA & Associates have to begin, and what it hopes to do differently than the company's erstwhile auditor who has resigned.
Watch The Full Interview Here:
Edited Excerpts From The Interview:
Mr. Chopra, I will come to you first, give me your first broad comment on the developments unfolding at Byju’s before we get to the specifics of the audit process.
Chopra: Let me say that it was a very unfortunate situation to be in that Deloitte are saying that so far as the modifications of FY21 are concerned, there has been no action. And so far as FY22 is concerned, the accounts have not been given to them with the detailed information. It's so unusual.
Deloitte has resigned and BDO has actually accepted the appointment for the next five years and to me, that's a far more serious concern than anything else, that if one auditor resigns, the other jumps at it ready to accept it.
What kind of information was not provided to Deloitte and what kind of qualifications was not acted upon for FY21? So, one may not be able to comment too much on that. But if Deloitte had resigned, one thing is sure that some very critical information either was not provided to them, or the management was not agreeing to some kind of modifications for the year FY22 and that forced Deloitte to resign. But I think resignation is never a solution to the problem.
So, even if the information was not being provided, I think one could have gone ahead with some kind of restraint... but probably it had so much of impact or so much of adverse opinion being created about it that Deloitte came to a conclusion that probably even forming an opinion that they will not be able to give an opinion, so they had to resign, which is very, very dangerous for any kind of profession and of course the company as well.
Santhanakrishnan, what do you make of the statement itself? It didn't give us any sort of details into what specific modifications that the statutory auditor and the company disagreed on. There have been several reports to indicate that the differences arose on account of refunds, loan guarantees, unusual revenue recognition practices. Are these sort of normal differences that occur in the audit process? What was unusual here or what could have been so in terms of opinion so pole apart that the auditor had to resign?
Santhanakrishnan: This resignation is something which is completely risky. And they are putting the investors into a total confusion. The same day the management itself appoints another leading brand and they come and take over it. This completely neutralises the effect of the previous auditor's resignation.
Second is I don't think these difference are very natural at all. In my opinion, if I am a user, it probably is not a very appropriate word. But greed is the word that comes to mind. I think the greed of doing business, greed of increasing the turnover, increasing the values. All these has contributed to accounting gimmicks. But from what I see is it's a typical way of boosting up your revenue, boosting up your profits, camouflaging your interest payments. All that if you could see from the paper reports points to inflating the valuations and cooking up the books.
Now, what is surprising is why should the resignation come two years later? The resignation should've come one year earlier. Every item in the revenue, as stated in the media, shows it was the conventional way of cooking up to a sales-driven organisation who confuses order to revenue, every order in the book that becomes the revenue in this company. That is what I suppose is the problem with the present position.
What will the new auditor do now? Where does it start?
Chopra: If Deloitte resigned on certain grounds that pertain to FY22 and it could not obtain the information, how will MSKA do it? I don't know how the new auditor will obtain the information. It's a very difficult question or will this new auditor issue a disclaimer altogether? They will have to first complete FY22 and then only come to FY23. They can't leave the opening balances in lurch under any circumstances.
Deloitte had just resigned and said that nothing has happened in this particular year. Then again, the new auditor will have to issue a disclaimer. There's nothing else that can be done under the circumstances and then the same thing could have been done by Deloitte also.
I personally feel very sad about this professional today that one auditor resigns and the other is willing to accept it immediately. I personally feel it is for the Ministry of Corporate Affairs to appoint some agency or to appoint some committee, to look into what were the grounds under which Deloitte resigned and this was one of my suggestions. Wherever an auditor resigns, you can put a threshold limit either in terms of the paid-up capital or in terms of indebtedness or in terms of turnover etc. Whenever an auditor of that particular organisation resigns. I think the MCA must step in immediately or if it is a listed entity, the SEBI must step in immediately. Within one month, you issue a report as to what has actually happened and then only some kind of auditor should either accept the appointment or should be appointed as an auditor by the competent agency.
This entire business of someone jumping at really accepting the assignment... I think this is absurd.
If the management doesn't share the data with an auditor or doesn't do the modifications that it's being asked to in its accounting practices, isn’t the auditor rendered helpless?
Chopra: Whenever you come across some of practices, you write to the people who are charged with the governance. And when you do write to them, you have to present it before the audit committee in any case as to what are the differences of opinion. And then the audit committee has to act in the matter and to try to reconcile the two situations under those circumstances. And ultimately, it is for the management and the auditor to sit down and resolve those issues.
Now, if the auditor comes to a conclusion that the accounting policy is absolutely wrong, you qualify the report, you issue a modified report, give the impact of that particular or wrong accounting policy. As per accounting standards, you have to quantify and then say what is going to its impact on the total financial position and the profitability of the organisation.
You can't leave it in a lurch.
This is one thing which MCA and SEBI have been saying in the case of listed entities that you can't resign in the last quarter under any circumstances. It should be applicable to unlisted companies as well.
What would you have ideally liked Deloitte to do, given that they have said that they disagreed with the management on several aspects of accounting practices, etc.? What would a report that gives more insight into the financials look like?
Santhanakrishnan: In its report on March 31, 2021 Deloitte has said that parent and subsidiary companies have not maintained adequate financial controls. Sudden material weaknesses exist, including revenue recognition, collection, determination, recording of customer details, collection comparisons inadequate... does all this not say that the accounts are not reliable in FY21.
They should have done the same for FY22 before resigning. They should have done the audit, made a complete disclaimer and they should have given reasons for it. It would have clearly brought out the issues and the new auditor would have had to address that.
All the work that Deloitte did for FY22, does BDO sort of look at that at all or doe sit start afresh? What is the practice when it comes to picking up from another auditor?
Santhanakrishnan: I think it's important for them to start the audit all over again. They are supposed to communicate with the previous auditor, but invariably he doesn't tell you everything. In fact, I believe that now there should be an audit of reason for resignation first because you have a duty and a responsibility to the public to tell them why you resigned, and you cannot be very nice about it all the time. So, in my opinion, generally, the auditors will not share working papers and will not disclose the real reason. So, the new auditor may have to do it all over again.
So whatever work Deloitte did for Byju’s, that's not relevant anymore?
Chopra: It can be relevant from the investigative agency point of view, if at all there are investigations or inspections by the MCA.
There have been reports of MCA notice to the company, which it has denied. If let's say MCA does initiate an inspection, how will that run parallel to now this new auditor coming in?
Chopra: If the MCA hasn't, it should've initiate the investigation immediately and also ask Deloitte on what grounds did you resign.
The new auditor will step in and should ideally write to the previous auditor. But that doesn't happen - people feel since earlier auditor has resigned, why should I write to him. I believe in such cases you should ensure to write to him.
There must have been compelling reasons for somebody to resign. You must try to seek the reasons of his resignation. But my hunch is that probably the new auditor will do this particular job more discreetly. The MCA has to act in the matter, and ensure the work of Deloitte is utilised by the inspection team. Whatever work that Deloitte has done, it should be called for and on whatever points the differences were, they should be looked into whether the auditor was right or the management was right.
Does the National Financial Reporting Authority has a role to play here?
Chopra: Yes, NFRA has a role to play.
Santhanakrishnan:: NFRA has a full role to play. It's a wonderful case, a sample case for NAFRA to enter at the accounting side. NFRA has always been looking at the auditors. It is high time NFRA starts looking at the accountant side of things. NFRA has got both roles - to look at the accountants as well as the auditors. So far, they have been looking only at the auditors. It's time for them to look at the accountants as well. It need not even wait for MCA's notice, it can do on its own; suo motu.
Chopra: Yes, NFRA has a role to play. I have been raising my voice through various forums. That why only auditors? Why not the directors? Why not the CFOs who prepared the accounts or presented the accounts? I think the directors and the CFOs, the preparers of the accounts must be acted against by the government.
