GoMechanic auditors had raised red flags

GoMechanic co-founder Amit Bhasin. Founders Bhasin, Kushal Karwa, Nitin Rana and Rishabh Karwa own 25.5% of the firm.
GoMechanic co-founder Amit Bhasin. Founders Bhasin, Kushal Karwa, Nitin Rana and Rishabh Karwa own 25.5% of the firm.


Statutory audit reports filed by the company indicate a history of poor financial reporting and weak guardrails in internal financial controls.

Auditors of car service platform GoMechanic, whose founders confessed to errors in financial reporting, had previously identified non-compliance with accounting standards that should have raised red flags for investors.

Following the public confession on Wednesday, GoMechanic’s investors, who said they were unaware of the deception, commissioned a forensic audit of the startup’s financial reports by EY. However, statutory audit reports filed by the company indicate a history of poor financial reporting and weak guardrails in internal financial controls. To be sure, none of these audit reports indicates any financial fraud.

In FY20, PwC’s India affiliate, the auditor of GoMechanic’s holding entity Targetone Innovations Pvt. Ltd, issued a ‘qualified opinion’, documents accessed by Mint from Registrar of Companies (RoC) show. A qualified opinion indicates the auditor’s inability to give a clean opinion.

PwC’s auditor report said the firm does not “maintain inventory records for receipts and issuance of goods directly received by the customers (service partner workshops)".

The auditor also said there was no “formal documentation to map services rendered by the workshops to end-customers with commission invoices raised by the company on the workshops for its B2C (business-to-consumer) customers".

These concerns were addressed by the company and, therefore, did not reflect in the FY21 report, two people with knowledge of the company financials said.

However, in FY22, BSR & Co., an affiliate of KPMG International, issued a ‘disclaimer on opinion’ in its audit report noting that the “company has not established its internal financial controls with reference to financial statements". BSR audited the company’s statements in FY21 and FY22 and continues to be the auditor on record. There were no qualifications in FY21 and FY22. A disclaimer of opinion indicates the auditor is unable to express an opinion on the financial statements, and does not provide any assurance on their accuracy or fairness.

Internal financial controls apply to companies after they hit 50 crore in revenue, which became applicable for GoMechanic in FY22. GoMechanic reported its FY22 operating income at 91 crore from 34 crore in FY21.

On the management and the board’s responsibilities for internal financial controls, the FY22 audit report says: “These responsibilities include the design, implementation and maintenance of adequate internal financial controls that were operating effectively for ensuring the orderly and efficient conduct of its business, including adherence to company’s policies, the safeguarding of its assets, the prevention and detection of frauds and errors, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial information."

The auditor raised the point about internal financial control only in FY22, which was filed in September with the registrar of companies, a person familiar with shareholders’ thinking said, adding that the investor group was not aware of the poor financial controls before the audit report was filed. “This would have been addressed in FY23 by the board and the investors," the person cited above said.

Typically, however, boards do have access to information.

“Auditor qualifications are typically discussed with the management before they are finalized. Sophisticated investors also have information rights as part of investment agreements," said Yashojit Mitra, a partner at Economic Laws Practice.

The FY22 audit report also notes that GoMechanic “does not have an internal audit system", though it clarifies that it is not required to have an internal audit system according to the law.

Spokespeople for PwC and BSR declined to comment, while spokespersons for GoMechanic and the investor group did not respond to a request for comment.

Mitra added that any qualifications or critical remarks from the auditor should ideally set into motion changes in the company’s processes. “If there are red flags in the audit report, one would want to know what were the discussions and the remedial actions taken in the company to address/mitigate the concerns raised by the auditors," he said.

Sequoia Capital owns 26.89% of GoMechanic’s holding entity, followed by Orios Venture Partners at 17.1%, Tiger Global at 10.03%, and other investors with a combined 11.2% stake. The company’s founders, Amit Bhasin, Kushal Karwa, Nitin Rana and Rishabh Karwa, together own 25.5% of the company.

One allegation centred around Targetone Innovations includes the car service provider’s dealings with a select group of vendors or garages, indicating circular transactions or round-tripping to inflate revenues and misrepresent the actual scale of the business. Faster revenue growth helps companies command a higher valuation.

These allegations came to light when GoMechanic was trying to stitch together a new funding round to raise up to $75 million and was seeking a valuation of $800 million to over a billion. The due diligence led by SoftBank and Khazanah Nasional, the prospective new investors, brought to the fore the alleged irregularities. On Wednesday, the company said it was forced to let go of 70% of its staff because of a cash crunch.

At the end of March, the company’s financial statement reported a cash balance of around 119 crore. According to its FY22 financial statement, the company had accumulated losses of 205.9 crore till FY22.

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