Woolly accounting and voluntary auditors!

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The audited annual report of “The Complete Man”, for the financial year ended March 31, 2022, is a treat to read and savor… if you are not a shareholder of the woolen spinner Raymond Ltd.

The standalone accounts were debited with an exceptional loss of Rs907 crore relating to various components, resulting from the impairment of the assets of the subsidiary Raymond Apparel Ltd (RAL). An original accounting approach resulted in a significantly lower amount of Rs244 crore being reflected in the consolidated accounts. These figures can be corroborated by the relevant notes with the breakdown of the various items classified as exceptional losses in the individual and consolidated accounts for the period ended March 31, 2022.

The context of the above question lies in certain corporate actions, as detailed here.

On September 27, 2021, the Board of Directors (BoD) of Raymond Ltd (parent company) approved a plan to consolidate all of RAL’s businesses under a scheme of arrangement (SoA). This SoA has been structured as a split, so RAL will continue to survive, albeit, as will be explained in more detail, as a skeleton or less!

Curiously, on November 7, 2019, Raymond’s Board of Directors had approved a composite scheme, one of the components of which was the full merger of RAL! The scheme was pending with the National Company Law Tribunal (NCLT) and the BoD decided to cancel the previous scheme, when it proposed a new one on September 27, 2021.

The program was finally implemented with April 1, 2021 as the set date. The parent company’s financial statements for the year ended March 31, 2022 reflected RAL’s consolidated figures for the full year. As a corollary, RAL’s books showed an empty cupboard!

RAL’s gross assets, which stood at Rs 1,304 crore as of April 1, 2021, were effectively taken at around Rs 328 crore, reflecting an approximate erosion of the value of Rs 938 crore mentioned above ( subject to some adjustments to balance out the difference).

The scheme had a particular allocation of nearly Rs 600 crore owing to the parent company, which was termed quasi-equity and not adjusted under the SoA as it should have been. The scheme was designed as a spin-off leaving behind a few token assets that had little real value and included fictitious intangible assets.

RAL’s accounts were effectively erased from all positions and only two key figures remained there at the close of March 31, 2022. As explained above, the parent company had funded RAL to the tune of Rs600 crore; with the erosion of the value of RAL’s assets (which I discussed at the very beginning of this article), this amount represented a total loss that RAL was unable to reimburse to its parent company.

Instead of canceling this sum in the process of consolidating RAL’s business, the amount was reflected as quasi-equity in the RAL books and the corresponding adjustment figure was shown as negative capital (negative reserves ).

RAL’s financial statements are an insult to the intelligence of any reader of financial reports and the fact that they were signed by a firm of chartered accountants, without showing any embarrassment, is singular enough to lose confidence in the statements audited!

The scheme and the actions associated with it raise many questions about the conduct of the Board and the auditors of the two companies.

A 75% erosion in the value of RAL’s assets barely happened in just one year. It is also not easy to lose so much money in trading transactions!

The directors’ report, and the audit report of RAL and its parent company for the previous financial year ended March 31, 2021, did not even whisper about a potential loss! The parent company’s current year directors’ report also makes no mention of the amount ultimately written off. The notes to the accounts only tabulate the headings under which the cancellation is made and throw no light on the decisions taken, despite a few thousand words.

There is no explanation as to why the BoD canceled RAL’s earlier merger and changed it to a split, which seems more questionable from a compliance perspective.

RAL, which is a mere shell or not even that, increased its share capital from Rs23.5 crore to Rs601.30 crore after the split! The amount that should have been paid for this exercise does not even appear in RAL’s accounts!

The RAL accounts show an interest debit of Rs26.47 crore over the year, while the only balance on the books is the parent company’s quasi-equity of around Rs600 crore.

RAL has no income and no business to pursue for the entire year following the split. Yet the auditor had no trouble easing his awareness that with management’s efforts to convert zombie loans into equity, the going concern aspect was no reason to lose sleep!

The absence of “worry”, for the continuity of the business when the bedrock of the business is completely lost and with a false balance sheet that could have simply been extracted from the exam answer sheets of a failed CA student, is perhaps the greatest testimony to the independence of the professional who signed it!

Incidentally, RAL’s auditor, with no financial statements to audit, received Rs37.71 lakh in fees against Rs35.6 lakh paid the previous year when the turnover was over Rs500 crore! It’s not that he audited the company that was consolidated with the parent company. The parent listener was paid Rs20 lakh separately for this effort!

The report of the Director of RAL, which had no transactions during the fiscal year ended March 31, 2022, contains the remarks quoted below, which I have excerpted in part for the sake of space:

The company had outsourced internal and operational auditing to M/s Mahajan & Aibara Chartered Accountants LLP until the quarter ending June 30, 2021 and then appointed Messrs. Ernst & Young LLP, a reputable accounting firm for the period July 1, 2021 through March 31, 2022. The primary focus of the internal audit process is the testing and review of controls, independent risk assessment , operational processes and benchmarking of internal controls with best practices. The Company has a robust management information system, which is an integral part of the control system.

One really wonders about the nature of the internal control audit that a world-renowned firm undertook of a company that had no operations, no staff, no office space, and no only produced accounts that are the fruit of the wildest imagination!

Moving from the RAL and moving on to its parent, the quarterly results for the first three quarters of 2021-22 are deafeningly silent on the next delisting! Fourth quarter standalone results are represented by a single incomplete page on the company’s website! Therefore, no verification of what is supposed to be contained in the other three sheets is possible.

The complete absence of any word from the otherwise vociferous community of stock analysts, proxy advisors and the press, makes one wonder whether their silence has come at the cost of a few lengths of best cashmere baby wool!

In Hans Christian Andersen’s well-known fairy tale ‘The Emperor’s New Clothes’, it was an innocent child who exclaimed that the king was walking naked while everyone pretended to see a miraculous garment. adorning the person of the king!

Hopefully at least one of the many regulators in the field will be like the child and ask the questions most worth asking in this case!

(Ranganathan V is CA and CS. He has over 43 years of experience in the corporate sector and in consulting. For 17 years, he worked as a director and partner at Ernst & Young LLP and three years as a senior advisor after his retirement, responsible for developing E&Y’s practice in Chennai and Hyderabad in tax and regulatory matters. Currently, he is an independent director on the board of directors of four companies.)
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