INSUBCONTINENT EXCLUSIVE:
Sudden resignations by the auditors of a couple of companies have triggered a sharp drop in their share prices in recent times.
Deloitte
Haskins Sells India quit as auditor of Manpasand Beverages a few days before the declaration of annual results
The stock plunged nearly 50 per cent in five sessions following the announcement.
Shares of Atlanta tumbled 20 per cent on Friday after
Price Waterhouse chartered accountants resigned as its auditors.
Earlier, Vakrangee witnessed a similar development.
An auditor is
An unexpected resignation leaves shareholders as well as lenders in the lurch, as they wonder if there is anything amiss in its books of
accounts.
Why auditors quitAuditors have become bold and do not shy away from putting in papers if they find something suspicious in the
Some recent regulatory developments have also made auditors more conscious.
An auditor normally takes an easy way out, if he finds that the
company management would not like his opinion, Dinesh Kanabar, CEO, Dhruva Advisors, told ETNOW.
He said there were issues earlier with the
disciplinary powers of the Institute of Chartered Accountants and they have now been moved to an independent body, which looks at
Therefore, there is a heightened fear among the auditors.
In a couple of cases, auditors have also been arrested and sent behind bars
No auditor would like to face that ignominy
FlagsETMarkets.com spoke to various market experts to identify early signs that something may be not above board in a company
Arpinder Singh, Partner and Head - India and Emerging Markets, Fraud Investigation Dispute Services, Ernst Young, shared five pointers:
Skewed business performanceOrganisations exhibiting unusual profitability in saturated markets or in comparison to peers can possibly have
Another red flag could be organisations with significant changes in financial ratios from previous year to current.
Absence or low
implementation of policies or frameworksMost organisations with global operations would need to comply with applicable Indian and foreign
laws, which would require instituting policies or frameworks around whistle-blowing, code of conduct, code of ethics, anti-bribery or
Absence or low implementation of these policies can be a serious red flag, raising questions around corporate governance and ethical
concerns.
Unusual related party transactionsRed flags can also be in the form of unusual related party transactions that would include
inadequate disclosure of such transactions, fictitious or circuitous transactions.
Behavioural factorsPerpetrators of fraud can show certain
behavioural signs that may be red flags
These include an apparent change in lifestyle, financial or legal issues, frequent disagreements with the company (compensation/ job
rotation) and unusually close association with key vendors or customers.
Lack of tone at the top level as well as information or decision
making generally restricted to few important individuals and lack of transparency in regular transactions can also be matters of concern
Value investors have a different way of looking for such aberrations
Generally, they try to look for such signs in the books of accounts.
Frequent fundraising/equity dilutionNormally, one should avoid
companies that keep on raising funds by diluting equity
company, it does tell us the fact that either the company is trying to be too aggressive or the business is not self-sufficient enough to
generate funds for expansion
acquisition, most of the times the acquisitions turn out bad or the price paid turns out to be too high with a subsequent write-off
The common pattern that market experts have found is sales and profits of such companies grow every year just like their debt, and suddenly
one year, they report huge losses and become bankrupt.
While debt is a lifeline for capital-intensive businesses, however, if the company is
not taking a breather and consistently expanding by taking on huge debt then some day or the other it will find itself in trouble.
Value
While this strategy works well in good times, when the cycle turns, high debt levels cannot be served by cash flows, resulting in huge
While there is no golden rule, but any company where the debt-to-equity ratio is more than 1:1, one should study it carefully to see if it
coverage ratio is decreasing every year
It is being calculated by dividing EBIDTA with interest and loan repayment obligation in a year
If this ratio has come down to less than 1, it means that company has difficulties in repaying its debt and interest obligations
form too many subsidiaries are generally up to something
Basically, the modus operandi is that parent company offers loans to such subsidiaries, which then are unable to perform up to the mark or
report losses and finally the loans and advances are written off
Wealth.
High receivablesWhen you see that the debtors of a company are growing at a rate faster than that of sales then there is a big red
company is unable to collect money in a timely manner
This could happen due to lack of negotiating power with customers or they have a hard time to give money
This can happen because of tax exemptions or because the company is operating in a jurisdiction where there is no tax (eg Dubai / Mauritius)
While there could be genuine reasons for paying no taxes, sometimes a company may be showing profits because there is no cost for show
