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Setting up a joint venture plant in Muscat

Following the success of setting up the garment factory at the Jebel Ali Fee Zone, Finetex was invited to set up a joint venture plant in Muscat. The 23nd part of a series describing the unknown triumphs and travails of doing international business

The garment factories in the Jebel Ali Free Zone worked on a systematic basis and had no problem in getting the overseas staff, as visas were made available on request.

In fact, on one occasion, we got into serious problems. As per our standard practice, photocopies of the visas were sent to Haji Cader and based on that he would arrange the seat booking in the airlines and intimate the same to me by fax the names of pax so that I could take the original visa to the airport for clearance. We had a standby officer on duty at the Free Zone, in case we got into trouble of any kind, as names of Sri Lankan boys and girls were long and similar.

The flight time to Dubai was roughly three hours.  So, upon check in and flight departure, I would get the confirmation of pax, vis-a-vis the ID numbers we had provided for each new employee coming in. It so happened, that on one particular occasion after the flight left, we had a wrong Kusumawati on the flight, with the photocopy of a Kusumawathi who could not make it.  Now, as you can watch, the difference is “h” in the last part of the name, and, we know it would be really difficult to get her out of immigration, and rightly so. 

I rushed back to Free Zone office, explained the predicament; Mohammed Sharif in the administration assisted, and I was assured that someone from the office would meet me at the airport, with a new visa for Kusumawati who was on the flight! Without the official visa, the poor girl would be bundled back to Sri Lanka; if not, at best, she would have to spend overnight in the immigration office, until we produced the visa the next morning, if the OSD (generally the Director of Immigration) specially gave such permission. Thankfully, thanks to the prompt assistance, Kusumawati was cleared and reached the camp same day!

In the meantime, as our reputation was spreading far and wide, our orders were increasing and we were getting new and balancing equipments to meet the demands of the orders, which had progressed from simple T-shirts, to heavy-duty cold weather jackets for use in snow conditions. We had no scope to expand in the Finetex plant at Dubai.

One fine day, Zubair turned up and said that he wanted me to visit Muscat immediately and meet a businessman who wanted to get into a joint venture with us. I left for Muscat the following day and met the prospective partners, inspected their site and tried to make an assessment. At that time, there were couple of factories, including Gulf Industries (from the Free Zone, where I had just begun my garment career!) and the scope for development and export was vast.

A few days later, Piyasena Perera joined me for a technical assessment of the site. We spent two days to make up our mind about the feasibility of operation. One of the partners in the Muscat venture was an important high-ranking government official. Perera left, and I had to work out the plans, and stayed on for a few days more to work out the details and logistics.

On my return and submission of my report and assessment, Zubair confirmed the deal and about one week later, we had the industrial license in the name of Elegant Garments.

For easy reference, let us call the local ‘working’ partner as Abdullah.  He had a large house, which had a basement, a road level showroom, and first floor had a few large rooms. The terrace was open. I had to convert this building into a compact manufacturing unit, including housing facilities for some 200 odd staff members, at least 20 of them would be men. 

The distance between Muscat and Dubai on the highway is 440 km. The managers must also have road travel permits, so that they can travel to Dubai at short notice without any hindrance.  On the top of these, I had to arrange for catering facilities for the entire complement of 200+ staff.

Equipment wise, it did not take more than two days to place the order, and was promised delivery in 10 weeks. Right from cutting tables, all other related wooden furniture had to be specially ordered and made, to cover the factory requirements. A separate team was sent from Dubai, who would arrange for complete electrification of the site to convert the large halls into factory sites suitable for a garment factory. 

The carpenters had to take the necessary measurements to ensure bunker beds were prepared to utilize the maximum space in each of the rooms in the first floor. They had to make long benches and tables for the dining hall. There was an endless list and setting up a new factory in a totally new environment is not easy. We had to  set all these in place in less than 10 weeks and had to bear in mind that the technical team would come just the day after the goods are cleared from port, so that the Juki machines can be assembled and be ready for use in a few hours.

Once the commitment was made I flew back to Dubai and arranged to travel back by car with my land entry permit. It was decided that, as Muscat merchants come to Dubai to buy their requirements in bulk, we would be better off economically to have the goods manufactured by the carpenter in his workshop, and only return back to do the final finishing in Muscat.  

Likewise, electrical contractor made the survey and returned to Dubai so that they could fix it some 10 days before the machinery arrived; I had arranged to give the contracts to the same bidders who did our jobs earlier.

Piyasena left for Colombo, immediately upon my return; Haji Cader had already publicised our requirement for staff on both TV and radio, and as Finetex had secured a very high reputation in the market we had an unmanageable crowd of applicants. Perera returned back, with a full complement of staff and as he had a hand in finalizing the machinery list, we were confident that we would not even face teething troubles in this plant.

On schedule, exactly 110 days after the agreement was reached, we were ready for the plant to become operative. Our local partner Abdullah had no difficulty whatsoever in getting the required visa. Every Gulf country, by now, was copying the lead set up by Dubai, in setting up garment factories everywhere. 

It was Zubair’s turn to arrange for my departure to Muscat. He made it clear, that if I was willing to take care of the plant in Muscat, he would even go for discussion with Abdullah for this joint venture, which, in real sense, was that we were doing all the investment, and Abdullah was lending his ‘name’ for a partnership fee. We had another silent partner too, who remained in the background.

When the advance team arrived, it was Perera who went first and I joined him a day later. I had to take care of the team and in Piyasena’s presence all machinery were inspected and accepted.  In the following three days, the bulk of the staff arrived and it was possible to start production by the fourth or the fifth day. We had a plant manager and his deputy (woman) who had years of experience behind them and whom Perera knew personally and had selected the staff with great care.

Our direct orders booked by us at Finetex (for children's clothes I think, for Wal-Mart) were the first ones to be manufactured here. From day one, our production in this plant was in full swing; I had an office in the first floor and a separate accommodation attached to the office.  I joined the staff in the mess in the basement. We all had a minimum 10-hour production schedule every day.

I had two assistants, Francisca and Nancy, who helped me in doing my job in Muscat.

In less than three weeks after the production began, we made our first direct shipment to the USA. After this, I drove back to Dubai to be with my family for a couple of days, and returned back on a Monday morning after a visit to the Finetex plant, leaving there at about 9am and arriving in Muscat plant by about 1 30pm for a lunch with the staff.

Life in garment industry was not easy.  

(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce and was associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts. From being the advisor to exporters, he took over the mantle of a trader, travelled far and wide, and switched over to setting up garment factories and then worked in the US. He can be contacted at [email protected].)

 

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Statutory Audit or Forensic Audit?

 Audit is much more than checking the numbers. It has more to do with the application of analytical skills going beyond the books of accounts involving mere cross tally of figures. The auditor collects big money for attesting them all the same and the so-called disclaimers are mere fig leaves

A well-written article, All about Frauds, Corruption and Forensic Audit, in the CA Journal of September 2011, rightly examines at length the concerns of Forensic Audit vis-a-vis the Statutory Audit for corporate India today. 

The regulators—the ICAI (Institute of Chartered Accountants of India) and SEBI (Securities and Exchange Board of India)—ought to put this article on public domain inviting wider public comments from a cross section of stakeholders ranging from members of the accounting and audit profession to CFOs to RBI to individual investors.

In an interview, India-born Neeraj Monga, the analyst and Head of Research at the Toronto-based Veritas Investment Research goes back to his argument way back in 2006 that Yellow Pages, the second largest trust in Canada with a market capitalization of over $8bn, “past performance is no indicator of future results. We believe that YPG is the poster child of this adage... We thought there was a lot of dishonest accounting going on out there.” This stock that was trading at nearly $16 barely touches double digits—in pennies on the Toronto Exchange. 

Following the report released by Veritas Investment Research the shares of realty major DLF, which  has a 12% weightage on BSE Realty index, tanked on 1 March 2012 by 6.4% on BSE and 5.17% on NSE to Rs214.65 and Rs212, respectively. The report said, “In a best case scenario, DLF is worth Rs100 per share... The aggressive accounting approved by auditors, perpetuated and aided by investment bankers and media frenzy surrounding the IPO... from FY-07 to FY-11 the company inflated sales by at least Rs11,236 crore ($2,607 million) and PBT (profit before tax) by Rs7,233 crore ($1,690 million)... DLF has undertaken questionable related party transactions... The company has no free cash flow and no credible plan to de-leverage its balance sheet.” The report rightly points out that “all contributed to the myth that DLF is a corporate pillar of India.” That it is happening in our National Capital Region of New Delhi and the accounting and market regulators, ICAI and SEBI, are just watching it, this is a sad commentary on our tooth less watchdogs. 

At least DLF is a fit case for the SEBI’s new brain-child of setting up a separate Forensic Accounting Team to detect fraudulent transactions of companies, to strengthen investigation and force companies to improve corporate governance to unravel complex accounting jugglery and deal with the flood of complaints of companies rigging their financial statements and enable the regulator to take pre-emptive action. The Satyam scam is a telling regulatory failure to detect the mammoth fraud early on.  

The public perception, post-Satyam financial/accounting frauds, is one of complete of loss faith in the auditors’ reports that the shareholders are paying a bomb for, running into crores of rupees by way of audit fees for attesting the balance sheet and profit and loss accounts and separately the corporate governance, too.

The auditors’ reports are couched with enough disclaimers that seek to absolve the auditors even when they are in the know of the exact state of affairs. This leads the public at large to question whether they are neither true and fair, nor truly fair nor fairly true nor both. There is no value for money either.

Audit, it must be pointed out, is much more than checking the numbers. It has more to do with the application of analytical skills going beyond the books of accounts involving mere cross tally of figures, amounts and physical verifications or confirming that they have simply accepted certificates from the management at their face value to blatantly state in their report that the “accounts are the responsibility of the management.” The auditor needs to be reminded that he collects big money for attesting them all the same and these so-called disclaimers are mere fig leaves that cannot protect him!  

Given the changed conditions post-Enron in the US, BCCI in the UK, Satyam in India and also the frauds in Global Trust Bank and Wipro, there is absolutely no question/scope for either/or statutory or forensic audit or even a stand-alone forensic audit, it has to be a combination of both. 

The statutory audit has necessarily to revisit the approach to the audit methodology and process to upgrade it to include forensic techniques as a part of their SOP by sharpening the audit tools using analytical reviews to flag off a more detailed audit.

Presently we have in place, in addition to the Statutory Audit, other concurrently conducted audits in the same domain like internal, tax, proprietary, revenue, and special audit, etc, etc. This makes a strong case for combining the Forensic Audit as a part and parcel of Statutory Audit by extending its scope more particularly and essentially as fraud detection measures.    

Frauds in the form of manipulation of accounts, concealments, skimming, kickbacks, payoffs, greasing palms, bribes, embezzlement of cash, fudging and inflating of expenses and purchases, padding pay rolls, multiple reimbursements, collusive bidding, abuse of insider information paying ‘professional charges’ to cover payoffs, under-invoicing are common both the private and public sector and will continue in the PPP and SPVs, too.

It is here that an auditor has an effective and proactive role to play without reservations—to necessarily assume everyone to be guilty until proven otherwise to go into frauds lying concealed behind every other transaction that challenges the auditor to uncover them. The perpetrator of the fraud can be a lowly clerk in a remote corner of the country or the chairman at the corporate headquarters, a la Ramlinga Raju of Satyam. The amounts involved may be a few rupees of conveyance pinched at one extreme to the millions defrauded at the other. The auditor is paid to be pro-active and make use of his skills and diligence and not say that the fraud has not come his way. When he smells a fraud it is his duty to go deeper to ascertain flaws in the internal control system.  If everyone was so honest there would be no need for any auditor!

Gone are the good old days of a century-old English verdict laying down that the auditors are no bloodhounds but watchdogs! Unfortunately today, this one time so-called watchdog has failed dismally even to bark, leave alone to bite the culprit who, in the present circumstances, coolly walks away with crores of the hard-earned investments of aam janata, elders, pensioners and widows. By not reporting, to put the public on guard, the auditors are failing in their solemn duty. The US SEC (Securities and Exchange Commission) has indicted the auditors of Wipro and Satyam in the US but we are seen to be dragging our feet by penalizing the small fry in the audit and letting the big guns off the hook on technical grounds.

The present day auditors are only too keen on being done with completing the audit process so as to sign off as soon as possible and to collect their fat fee cheques. More of a business deal rather than remuneration for rendering an honest honourable professional service. The auditors today hesitate to ask questions or venture to go deeper to carry out in-depth checks even selectively. This is true when the epicentre of the fraud goes high above to the board level in the client’s organization. 

The auditors avoid qualified reports as it is perceived they would possibly tarnish the lily-white image of the client-company’s top management. The auditor needs have the courage of his conviction to question the dubious transactions that can embarrassing the high paying client’s top management that can land him in legal hassles leading to his removal as auditor at the next annual general meeting. Financial mis-statements have thus become the order of the day. The audit remark “Without meaning to qualify, we report that...” to me conveys nothing. This does figure in auditors’ reports of listed companies. Does this amount to a disclaimer of sorts? 

Now with the expanding role of the government and the public sector collaborating with the private sector via the PPP (public private partnership) and SPV (special purpose vehicle) in diverse fields including civic, military, defence and aviation sectors, it is now incumbent for the audit profession to come to accept and share with the equal role of the of the commercial audit of the office of the Comptroller & Auditor General of India (CAG).With their detailed diligently prepared exhaustive reports on the spectrum valuation, hydrocarbon allocation, Commonwealth Games and many more, the CAG has come to be accepted as a force to reckon with in India the fight against corruption. One telcom company furnished separate audited statements widely differing from their annual accounts. Both of them were duly attested by auditors.

A statement of the deputy chairman of the Planning Commission opposing the CAG scrutiny of the PPP projects running into thousands of crores alleging that they take away the flexibility for the private partner, simply smacks of the arrogance of the sarkari babu who sees that the opportunity for skimming via PPP is lost for him. After all, who better than the CAG knows how the babu’s mindset functions? The CA profession, in making a foray into the newer avenues of audits of the upcoming PPP, NGO and local self governmental sectors, needs to work more closely with the CAG to get an insight into these hitherto uncharted audit areas.    

(Nagesh Kini is a Mumbai-based chartered accountant. While in active professional practice has travelled the length and breadth of India in carrying out both private and public sector audits, was on the CAG and RBI audit panels. He has now turned into a financial activist.)

 

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COMMENTS

Surendra Gadi

5 years ago

One of the most relevant articles I have read

Aban

5 years ago

Thank you for this eye-opener article. Yes, it is not publicly unknown that much of what hugely paid big firms of Auditors (mostly the big four and those Indian firms with ex-office bearers of the Instt) as partners) certfy as "true and fair"tatement of the accounts of giants in business are usually cosmetics. In fact, it is the CAG which should publicise the ICAI article and Mr. Kini's piece in the interest of the public.

WGC offers gold at 6% discount for 'Akshaya Trithiya'

World Gold Council is offering a discount of 6% on gold coins through 980 Post offices in India

Mumbai: World Gold Council (WGC) on Thursday said it is partnering India Post and Reliance Money to provide options to consumers for investing in gold this Akshaya Trithiya. WGC is offering a special discount of 6% on purchase of gold coins from about 980 post offices across the country for a limited time.

Starting from today until 30 June 2012, consumers can purchase Swiss-manufactured gold coins in denominations of one gram, five grams, eight grams, ten grams, 20 grams and 50 grams from a network of 980 India Post outlets across the country, World Gold Council said in a statement.

Akshaya Trithiya, which falls on 24th April this year is considered a particularly auspicious day to buy gold and is believed to bring a family long-term prosperity and success.

"During 2011, Indian households continued to turn to gold as a store of wealth, with gold now accounting for seven percent of household savings. We are therefore delighted to be working in partnership with India Post on this gold coin promotion," Ajay Mitra, managing director for India and Middle East at WGC said in a statement.

"One of our primary objectives in India has been to make pure gold accessible to all segments across the country, as we believe in the long-term value of gold as an integral part of a savings portfolio. India Post's extensive network, combined with its credible and trust-worthy brand, means it is the perfect partner for such an initiative, and we look forward to working together for many years to come," he added.

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COMMENTS

PARUL

5 years ago

update us the list of post offices to enable us to get the scheme.

Narendra Doshi

5 years ago

Is the discount on daily gold price basis, applicable for the day? How do we know prices?

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