Just when it appeared that audit resignations are mundane, comes the news of Deloitte Haskins & Sells LLP walking out on an assignment that netted Rs 2.74 crore in fees in FY 2023 just for a holding company and a further unknown sum for the various material subsidiaries.
Adani group has been weathering a storm that originated in January 2023, when a US based short seller, Hindenburg, brought up various allegations of impropriety and wrong doings by the group. Much water has flowed since, and the group has steadfastly denied all the allegations, though it did suffer a sharp fall in the share prices and some dent in terms of shelving its fund-raising programme. The supreme court appointed committee gave a clean chit and SEBI has virtually gone into a shell on this matter!
The note from auditors
Post revelations, various group companies issued their financial results for the third quarter around early February 2023 and Adani Ports and Special Economic Zone(APSEZ) issued its results on 7 February 2023 which was subjected to the limited review by its auditors, Deloitte. The audit report accompanying the financial statements did not reflect any potential concern about the short seller’ allegations though it referred to the note furnished by the management, to the accounts, providing their response that the allegations were unfounded and did not have any impact on the accounts. However, while issuing the final annual report on 30 May 2023 the auditor qualified the accounts on certain matters and also added a note which would look quite out of place in any audit report.
The said note is reproduced here- “Other Matters (a) We are not statutory auditors of majority of the other Adani group companies and 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 Group during the year. Our opinion on the consolidated financial statements above and our report on Other Legal and Regulatory Requirements below, is not modified in respect of the above matter.”
Possibly this was not observed by anyone as no public comment on this or a discussion around the appropriateness of it by the audit professionals happened. Interestingly, the auditor has provided this very reason to exit the audit assignment that is valid for four more years.
The reason for the resignation that Deloitte had no access to other companies in the Adani group with which APSEZ had business relations may raise a fundamental question, whether such an approach would be adopted by them in all cases, where they get the audit assignment of only one of the companies of a large group with multiple entities! The business of the Adani group involved group transactions in all the years and the sudden realisation that the audit of just one of the many companies in the group, being seen as a risk or an audit weakness is difficult to fathom. The director’s report of the same date gives the impression that the audit relationship continued with no sign of any discomfort.
What changed in- between?
Going beyond the imbroglio on resignation, it is also noticed that they have qualified the accounts of 31 March 2023 under the caption
“Report on the Internal Financial Controls with reference to consolidated financial statements under Clause (i) of Sub-section 3 of Section 143 of the Companies Act, 2013 (“the Act”)”
Basis for Qualified opinion
According to the information and explanations given to us and based on our audit, the following material weakness has been identified as at March 31, 2023: The Group did not have an appropriate internal control system in respect of conducting an external examination of allegations made on the Group, including on related party relationships, which could potentially result in possible adjustments /disclosures of related party relationships, balances and transactions in the consolidated financial statements and compliance with applicable laws and regulations. A ‘material weakness’ is a deficiency, or a combination of deficiencies, in internal financial control with reference to consolidated financial statements, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Such a note was not found in the limited review done on 7 February which was post the revelations of the short seller. It is for the experts in the field to debate if this note was not relevant for the Q3 results since a material weakness in the internal control on financial reporting would affect the results for all reporting periods.
The key question is whether as the statutory auditor of APSEZ and all its key subsidiaries whether Deloitte did not have an ability to check the related party transactions and the correctness of the same, independent of the allegations placed by an external source.
If over the years the internal control for financial reporting did not occasion any concern, how did the position change based on a third party who made the allegations, with no benefit of any access to data and details that an auditor has?
Deloitte’s resignation of audits across a few companies may become a compilation of case studies for more informed professional to debate!
An exciting episode as this needs a dramatic ending, came in with the new auditor MSKA & Associates filling the void on the very same day as the audit APSEZ board accepted Deloitte’ resignation!