Deloitte’s Adani Ports exit reveals a Hindenburg link

As a “material weakness" identified as at 31 March, Deloitte said, “The company (Adani Ports) did not have an appropriate internal control system in respect of conducting an external examination of allegations made on the company."

Deloitte said Adani Ports did not have adequate internal control system to even examine veracity of allegations ( made by Hindenburg) on related party relationships, which could potentially result in possible adjustments or disclosures of related party relationships, balances and transactions in the standalone financial statements.

A ‘material weakness’ is a deficiency in internal financial control, in the absence of which there could be a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be detected in time.

After a 90-minute meeting on 12 August between Deloitte and Adani Ports, in a 163-page resignation letter Deloitte said, “We are not statutory auditors of a substantial number of other Adani Group of companies (as referred to under “Other Matters" ...) including an Adani Group company (and its subsidiaries) after completion of our term of five years."

“Therefore, the scope of our audit does not extend to any transactions or balances which may have occurred or been undertaken between these Adani group companies and any supplier, customer or any other party which has had a business relationship with the company during the year," said the letter.

Adani Ports, Deloitte said, entered into Engineering, Procurement and Construction (EPC) purchase contracts substantially with a fellow subsidiary (“Contractor") of a party identified in the allegations made in the Short Seller Report (Hindenburg).

As at 31 March 2023, a net balance of ₹2,457.05 crore is recoverable from this contractor, of which ₹713.63 crore relate to security deposits paid to the contractor and ₹1,501.50 crore in respect of capital advances.

The security deposits carry an interest of approximately 8% per annum and are refundable by the contractor either on completion or termination of the project against which the security deposit was given by the company.

“Security deposits totalling ₹713.63 crore have been given prior to 1 April 2022, of which security deposits amounting to ₹253.63 crore relate to projects which have not commenced as at 31 March 2023," said Deloitte.

Additionally, there were financing transactions (including equity) with/by certain other parties identified in the allegations made in the Hindenburg report, which the company has represented to Deloitte as not being related parties.

Adani Ports has represented that there is no effect of the allegations made in the Hindenburg report on the standalone financial statements.

The company did not consider it necessary to have an independent external examination of these allegations.

“The evaluation performed by the company does not constitute sufficient appropriate audit evidence for the purposes of our audit," said Deloitte.

On 24 January, Hindenburg’s report alleged that transactions by Adani Ports and other Adani Group firms with certain parties were not appropriately identified and reported as related parties, which were not in compliance with laws.

Deloitte revealed in the letter that after studying the design of the company’s internal control systems the audit firm had requested Adani Ports to initiate an independent external examination of these allegations to determine whether they have any effect on the financial statements.

But the company refused to carry out such an independent examination, stating that basis their evaluation these allegations have no effect on the company’s financials.

Adani Ports told Deloitte that because of the ongoing investigation by the Securities and Exchange Board of India as directed by the Supreme Court, the company did not consider it necessary to initiate an independent external examination, said the letter.

Adani Group, on Saturday said, its port business arm Adani Ports and SEZ Ltd., which is the main revenue contributor to the Gautam Adani-led group, has appointed M S K A & Associates (an independent member firm of BDO International), as APSEZ’s auditor.

Mint reported on Friday that Deloitte Haskins and Sells has decided to resign as Adani Ports’ statutory auditor, citing differences of opinion.

In Deloitte’s recent meeting with APSEZ management and its audit committee, which, by policy, is comprised of and chaired by independent directors only ( G. K. Pillai, Prof G. Raghuram, P. S. Jayakumar and Nirupama Rao), Deloitte indicated a lack of a wider audit role as auditors of other listed Adani portfolio companies, said Adani Ports in a statement Saturday evening.

Adani Ports’ audit committee was of the view that the grounds advanced by Deloitte for resignation as statutory auditor were not convincing or sufficient to warrant such a move, said the statement.

“It was also conveyed that it is not within the remit of the APSEZ and its board to recommend group-wide appointments as other listed Adani portfolio companies are completely independent, with separate boards, executive teams and minority shareholders. Following this, Deloitte was not willing to continue as APSEZ’s statutory auditor and, therefore, it was agreed to amicably end the client-auditor contractual relationship between APSEZ and Deloitte," said Adani Ports.

Deloitte Haskins has been Adani Ports’ auditor since FY2018 and was reappointed for another five-year term as the statutory auditor only last year.

The Adani Ports statement mentioned that in response to a particular query by the audit committee, Deloitte confirmed that they have received all the APSEZ information from the management of the company, before deciding to resign.

“The same has been confirmed by Deloitte in their resignation letter dated 12 August 2023 to the company," said Adani Ports.

While Deloitte’s premature resignation raises concerns about the company’s accounting practices yet again, in its Saturday statement Adani Ports said, “The ‘other matters’ highlighted in the auditor’s resignation are adequately disclosed and addressed in the FY23 financial statements," said Adani Ports on Saturday.

“We are fully confident that these matters will be appropriately resolved in our September ’23 filing," said Adani Ports in its statement.

Deloitte’s notes to financial statements as the auditors, both for FY23 and the June quarter, mentioned that Adani Ports re-negotiated the terms of sale of its container terminal under construction in Myanmar with Solar Energy Ltd, which resulted in an impairment loss of ₹1,273.38 crore.

“The (Adani) group did not consider it necessary to have an independent external examination of these allegations (made by Hindenburg) because of their evaluation and the ongoing investigation by the Sebi," Deloitte said.

Deloitte had mentioned in the company’s FY23 financial results that “there were financing transactions (including equity) with/by certain other parties identified in the allegations made in the short-seller report, which the group has represented to us were not related parties."

On 24 January, US-based short-seller Hindenburg Research alleged that the Gautam Adani-led group executed the “largest con in corporate history," triggering a collapse in Adani group stocks, resulting in a market value loss of over $150 billion and removing Gautam Adani from the top 10 ranking of the global rich list.

This is the third change in auditors for Adani Group companies over the past few months. In May 2023, Shah Dhandharia & Co. LLP stepped down from their role as the auditor of Adani Total Gas. It was replaced by Walker Chandiok & Co. LLP.

In an exchange filing on 8 August, Deloitte brought attention to specific matters within the auditor review report included in the June quarterly earnings statement of Adani Ports.

Deloitte reviewed Adani Ports’ interim financials as the “independent auditor" for the June quarter.

Such a review is substantially less in scope than an actual audit, and therefore, it does not enable the auditor to obtain assurance that it would be aware of all significant matters.

In the review report on Adani Ports, Deloitte mentioned a net balance of ₹3,871 crore recoverable from a contractor that provided EPC services, which the company believed was not a related party.

“However, the contractor was identified as a related party in a short seller (Hindenburg Research) report published in January 2023. The net balance with the contractor increased by ₹122 crore on a sequential basis in the June 2023 quarter," Deloitte said.

Deloitte’s resignation comes just days before the much-anticipated probe report on the Adani Group by the Indian markets regulator.

The Supreme Court directed the Securities and Exchange Board of India (Sebi) to submit its investigation report on Adani Group’s market transactions involving 13 suspicious foreign portfolio investors by 14 August.