This series on account frauds has already exposed the blatant loot of public funds through disguised lending to related parties like
Reliance Housing Finance Ltd (RHFL) or an outright burglary as in the Dewan Housing Finance Corporation Ltd (DHFL) case.
This time, the window opens to recount two nuanced accounting frauds that helped shore up key numbers, conveniently jack up performance and achieve a better market response.
A jugglery to show an exaggerated book effect, just like a magician’s trick. And, like what a magician does, the effect is transient and temporary!
Though a somewhat abrupt start, the narration starts in reference to an order passed by the Securities and Exchange Board of India (SEBI) on 11 October 2024.
The two among the various directions issued by the regulator, which deserve focus alone, are extracted due to space constraints.
The noticees are the directors of Royal Orchid Hotels Ltd and the listed entity itself.
They are charged with the offence of accounting manipulation and directed to provide a fresh set of accounts to rectify the violation found in the order of the regulator.
The fresh set shall be certified by another accountant and not the statutory auditor of the company who certified them previously.
Royal Orchid is a well-known brand in the hospitality industry and operates more than a hundred properties.
While some properties are owned by the company, many are through joint venture (JV) and other like arrangements.
One such JV company is Ksheer Sagar Developers P Ltd (KSDL) that is owned 50% by Royal Orchid and 50% by the JV partner.
Until FY20-21, the said company was part of the consolidated accounts of Royal Orchid. On 2 March 2022, the company took the position that its control over KSDL had ceased and treated it as an associate company.
In the consolidated accounts for FY21-22, a remeasurement gain was computed, equivalent to the value of the investment held in KSDL, that entered the books as an exceptional income, shown below.
The financial condition of KSDL is brought out in the following note.
SEBI’s investigation of the nature of the arrangement that Royal Orchid had with regard to the JV and various other operational details revealed that Royal Orchid continued to have control over the affairs of KSDL and it should not have deconsolidated the accounts.
The two among the various contentions that the company took to defend its position that the JV company was not controlled by it after 2 March 2022, are reproduced below for special attention.
The first such contention that piques one’s interest is that the decision on whether the consolidation was required or not was based on the expert opinion given by two professionals.
The gist of the professional opinion is given below, as extracted from SEBI’s order.
The experts who opined looked at a very limited compass of just the numerical composition of the board in providing their opinion.
They also failed to note that the said company being private had no actual requirement for an independent director and quite possibly the appointment was a ploy to change the board’s strength outwardly.
With no disrespect to them, it was clearly an incomplete analysis and missed many aspects of the actual functioning of the JV and the critical operational controls that Royal Orchid had over the JV’s day-to-day operations.
The second defence of the company was that the auditor did not adversely comment on this matter.
That part of the SEBI order dealing with this contention is extracted below.
SEBI makes no adverse reference to the work done by the auditor but puts the same in its proper perspective by noting that the aspect of the audit opinion being unmodified has been referred to the national financial reporting authority (NFRA)!
The auditor seems to have glossed over the entire issue. Most likely, they relied on the opinions given, though there is no explicit mention of that anywhere.
The NFRA conclusion on how the auditor arrived at an independent view that the control over KSDL had ceased as claimed by the management should be of interest as it may uncover the possible gaps in the audit process.
Royal Orchid is a small and less fancied company in the bazaar and this case may not be widely commented on in the popular media.
A case that occurred two years back that SEBI sanctioned in October 2022, which some of the readers may have missed, is likely to get the adrenaline flowing faster!
Bombay Dyeing Manufacturing Company Ltd (BDMCL), a major producer of polyester and branded textile material, turned to real estate development to boost its fortunes.
Between FY11-12 and FY18-19, SEBI found that the company had jacked up its revenue by Rs2,492.24 crore and its net income by Rs1,302.20 crore.
This happened by BDMCL treating one of its group companies, SCAL Services Ltd, as a non-associate company, by allegedly rigging its shareholding below 20%.
BDMCL entered into an agreement with SCAL for the sale of the residential flats being developed by its real estate wing.
It recognised the full revenue and the corresponding gains when no effective sale to a third party at arm’s length actually took place.
In other words, it was like BDMCL treating its inventory as a sale and recognising the gains on that.
SEBI conducted a detailed investigation.
In this case as well, SEBI noticed that the company took as its defence the expert opinions received from two CA firms.
Manohar Chowdhry Associates and ND Gupta are the ones specifically mentioned as having issued opinions to support the stand of the company in not treating SCAL Services as an associate company and thereby being able to value the transactions inclusive of the profit element in those.
It appears both the firms have a former president of the Institute of Chartered Accountants of India (ICAI) as one of their partners!
However, in this case, the auditors had incorporated an emphasis of matter (EoM) in their report highlighting the potential inflation in the revenue and the profits from these transactions.
One such sample given in FY17-18 is given below for information.
To a fastidious eye, this certainly falls short of how an auditor with an independent mind is expected to react to a transaction of this nature.
But, given what passes for an audit, maybe this is an acceptable benchmark!
SEBI not only charged the persons managing the day-to-day operations for the offence of fiddling with the books, but also the independent directors on the audit committee who served during the relevant years.
Many of the persons so charged with a fine, represent some of the well-known names in corporate India.
The matter is currently under appeal before the securities appellate tribunal (SAT).
The
‘jaadugar’ accountants are not just those who draw a salary and dance to the tune of the bosses.
They come in all shapes and forms!
First, are the auditors who bend backwards like a reed in a storm.
The consultants and experts opining on the contentious issues come next.
They work with a very limited brief and do no independent evaluation of the circumstances under which the issues arise, and cover their so-called professional credibility with multiple scope limitations and who can rely on their advice.
Equally, if not more guilty, are those in the audit committees drawing a fat commission for sitting through four-odd meetings in a year and thinking that their job is done with legal opinions stacked up in the files.
In the fitness of things, all of the above persons should be hauled up in corporate frauds and the fudging of the accounts.
(This is seventh part of a multi-part series)
You may want to previous articles in this series…
(Ranganathan V is a CA and CS. He has over 43 years of experience in the corporate sector and in consultancy. For 17 years, he worked as Director and Partner in Ernst & Young LLP and three years as senior advisor post-retirement handling the task of building the Chennai and Hyderabad practice of E&Y in tax and regulatory space. Currently, he serves as an independent director on the board of four companies.)
