Mumbai: The limited review reports (LRRs) by auditors on the quarterly financial reports of listed Indian companies have revealed significant accounting issues at some large companies though some of the firms are contesting the auditor findings citing ambiguities in how certain losses are to be treated.
The seven firms in question are: Essar Shipping Ports and Logistics Ltd, Essar Oil Ltd, Suzlon Energy Ltd, United Breweries Ltd, Thomas Cook (India) Ltd, Ashapura Minechem Ltd and Oriental Bank of Commerce.
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As per listing agreement norms set by India’s markets regulator, the Securities and Exchange Board of India (Sebi), companies have to submit these limited reviews—a low-level audit assurance mandated in 2000—to stock exchanges before the end of the next three-month period, and then correct any discrepancies. Auditors routinely point out such accounting gaps in their LRR and the companies inform Sebi of the corrective steps they intend to take.
But, this time, a lack of clarity in certain accounting treatments such as for mark to market losses and agricultural debt waivers have led some companies to contest the findings and the amounts at dispute are large.
At least 180 companies filed the reports for the quarter ended 30 September to the Bombay Stock Exchange between 14 November and 11 December.
The remaining listed firms have until the end of December to file their reviews.
Based on these reports, Sebi can take action immediately if there is a serious gap, or if the company fails to respond to gaps pointed out in an LRR.
“The idea behind this review is that there should not be serious changes at the end of the year,” said Jayant Thakur, a Mumbai-based chartered accountant. “Technically, if the companies don’t take any action, then penalty can be levied by Sebi under the listing norms. If there is a glaring violation, then Sebi takes an immediate action.”
Thakur, however, said he hadn’t yet come across any action by Sebi based on these reports. A whole-time director of Sebi, who declined to be named, also said he was not aware of any regulatory action based on LRRs.
Among the seven firms, Oriental Bank was cited in three instances for a total of Rs851.61 crore in accounting gaps. Its auditors N. Sarkar and Co. have said in their report that the income-tax liability provided by the bank has resulted in “writing back of income-tax provision of Rs147 crore pertaining to previous year”, and that the agricultural relief scheme of Rs374.61 crore applicable to farmers has not been accounted for.
Additionally, the bank’s auditors said in their report: “The bank has an outstanding repo transaction of securities of AFS (available for sale) category under liquidity adjustment facility with RBI (Reserve Bank of India) as on 30 September wherein Rs330 crore, being the difference between book value and the amount received there against, has been included in ‘other assets’ without any provision.”
The auditors also noted that the bank had made provisions for employee benefits, income-tax and depreciation on fixed assets on an estimated basis.
Oriental Bank didn’t agree with the findings.
In a detailed email to Mint, the bank said it was complying with all the norms established by the government, RBI and the income-tax department.
It said the provisions towards tax liability, depreciation and employee benefits are “done on an estimated basis as per the practice followed by the entire banking industry (in terms of RBI guidelines)” and that the actual liability is provided at year-end.
As for the writing back of income-tax provision of Rs147 crore, the bank said it had “exercised the option as permissible for adopting the method of valuation of applicable securities on individual scripwise basis as against bucket basis.
The excess income-tax provision available was hence duly written back and shown separately while publishing the quarterly results.”
The bank also said the agricultural debt waiver, which is different from and in addition to debt relief, has been treated in accordance with RBI guidelines, which provide for postponement of the scrutiny of claims up to 31 March and the filing of duly audited claims by 30 June.
Oriental Bank also said it has followed RBI guidelines for the provision relating to outstanding repo transactions of securities under AFS category.
As for Essar Shipping, Essar Oil and Ashapura Minechem, their auditors cited errors in reporting foreign currency losses.
In its report on Essar Shipping, auditor Deloitte Haskins and Sells said the firm has not declared a foreign exchange loss of Rs192.57 crore in the quarter ended 30 September, and has reversed unrealized foreign exchange losses amounting to Rs94.87 crore from the earlier quarter,thus overstating profit before tax for the half year by Rs287.44 crore.
The company said it would wait until the end of fiscal 2009 before accounting for all notional gains and losses. In an email response to Mint, V. Ashok, a director with Essar Shipping, said accounting for the fluctuations every quarter “would not reflect the accurate value of the assets and the financial performance of the company to our investors”.
Ashok said foreign exchange losses of Rs93.59 crore for the quarter ended 30 June were reversed and added back to the period ended 30 September.
Deloitte Haskins and Sells also said Essar Oil had not adjusted unrealized foreign exchange loss amounting to Rs373 crore, and had not provided for mark to market losses of Rs47 crore on the outstanding commodity derivatives contract for the quarter. This, it said, had the effect of converting net loss of Rs394 crore and Rs364 crore for the quarter and half year ended September 2008, respectively, into net profit of Rs26 crore and Rs56 crore for those periods.
A spokesperson for Essar Oil also said the firm would account for forex losses at year-end, and added that it “has a natural hedge in respect of its entire foreign exchange transactions—given that it imports crude and sells majority of its products to Indian OMCs (oil marketing companies) at international prices linked to dollars and the balance are exported in dollar”.
Ashapura Minechem was found to have excluded notional loss on hedging foreign currency exposure of Rs212.08 crore. The firm disclosed it had taken derivative options from banks with maturity up to February 2013 to hedge its exposures.
In a note in its results, the company clarified that “since the foreign currency against the contracts is intended to be delivered on and around the specified dates, the said loss is not crystalized and hence not accounted for at this stage.”
United Breweries Ltd, a UB Group company and the country’s largest beer and spirits producer by sales, was found by Price Waterhouse to have failed to make a provision for possible losses of Rs58.95 crore from reduction in value of long-term investments in joint ventures.
A spokesperson for the group said the joint ventures actually referred to investments made by United Breweries in manufacturing units that had incurred initial losses but are in the black now. “The auditor has just brought out the fact and not qualified it,” he said.
Windmill maker Suzlon did not made a provision for proportionate premium of Rs211.63 crore on redemption of $500 million in zero-coupon convertible bonds due in 2012, SR Batliboi and Co. said in its report on the company. “The same (convertible bond) is treated by the company as a contingent liability,” said SR Batliboi. A zero-coupon convertible bond can be converted into common stock at a certain price upon maturity.
A Suzlon spokesperson declined to comment.
Travel firm Thomas Cook also failed to expense the proportionate premium of Rs7.05 crore payable upon redemption of preference shares, said an LLR submitted by Lovelock and Lewes Services Pvt. Ltd. The report said the company has adjusted these expenses against “share premium collected from a proposed rights issue of equity shares”.
A spokesperson for Thomas Cook declined to comment, claiming: “The company is maintaining a silent period till the rights issue is out.”
Ashwin Ramarathinam contributed to this story.
Graphics by Ahmed Raza Khan / Mint