RINGSIDE VIEW. Flaws in internal audit function come to fore

The disclosure on November 7 by National Peroxide once again highlighted the gaps in the internal audit function, even as SEBI is tightening the noose on companies.

In a disclosure to the stock exchanges, Nusli Wadia-controlled National Peroxide said that based on preliminary examination, it appears prima facie that the funds of the company have been embezzled by an employee - Nipul S Trivedi. Others, if any, are yet to be identified.

The investigations reveal that the amount could be approximately ₹36 crore.

During FY17, the company reported 9.39 per cent y-o-y rise in net sales to ₹255.46 crore, while net profit stood at ₹47.85 crore (₹17.97 crore during FY16). EBITDA stood at ₹72.67 crore.

The current year’s profit is likely to be impacted correspondingly due to this fraud, National Peroxide said further.

“Pursuant to the internal assessment carried out in accordance with the Policy on Criteria for determining materiality of events, adopted by the company with effect from December 1, 2015, the company has taken necessary steps and has appointed a reputable agency to conduct forensic audit and has also obtained legal advice. The report of the forensic auditor is expected by the end of this month,” according to the disclosure by the company.

According to SEBI Clause 49, an audit committee is required to review the following: Whether in the entity, the internal audit function is being made functional in proper order by reviewing the structure of the internal audit department, personnel recruited and seniority of the official who shall be heading the department, frequency of audits and terms of remuneration of the chief internal auditor. Internal audit reports relating to weaknesses found in internal controls, the findings of any internal investigation by internal auditors in matters where there is suspected fraud or irregularity, or a failure of internal control systems of a significant impact; and most importantly the CEO and the CFO are required to certify to the Board that they accept responsibility for the effectiveness of internal controls, and that they have disclosed to the auditors and the audit committee deficiencies in the operation of the internal controls, if any, and steps taken for their rectification.

The above clauses and others are part of the Listing Agreement, with which every entity listed on Indian stock exchanges must comply. The Board of Directors has laid down internal financial controls to be followed by the company, according to the FY17 Annual Report of National Peroxide.

“These internal financial controls are adequate and were operating effectively. The internal financial control system is supplemented by a programme of internal audits to ensure that the assets are properly accounted for and the business operations are conducted to adhere to laid down policies and procedures,” says the report.

The Audit Committee of the Board of Directors meets regularly to review, inter alia, risk management policies, adequacies of internal financial controls and the audit findings on the various segments of the business, it added

Considering National Peroxide is such a small company, one is hopeful that it doesn’t have any contagious effect on the quality of internal audits at other Wadia-owned companies such as Bombay Dyeing and Brittania India!

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