A day before the company’s Annual General Meeting, Deloitte Haskins & Sells — the auditors of Financial Technologies India Ltd (FTIL) — stirred up a hornet’s nest by saying that their report on the company’s financial statements should ‘not be relied upon’.
The FTIL stock dipped 10.25 per cent on Wednesday, with some investors demanding to know whether this meant that the auditors had washed their hands off the financial statements. Others wanted to know the future course of action on FTIL.
Asked whether an auditor can withdraw his report, a leading auditing expert R.G. Rajan, Principal Partner, RG Rajan Associates, says, “The Standard on Auditing does not permit any auditor to withdraw his audit report. He can only ask investors or others not to place future reliance on the audit report.”
SA 560
So, why did FTIL’s auditors red-flag the report? Deloitte did not offer explanations citing client confidentiality. But it referred to the Standard on Auditing (SA) 560, which allows an auditor to change his opinion if ‘subsequent events’ require it.
SA 560 says that if financial statements are affected by “events occurring between the date of the financial statement and the date of the auditor’s report, and facts that become known to the auditor after the date of the auditor’s report”, an auditor, “shall discuss the matter with the management, determine whether financial statements need amendment and if so inquire how the management intends to do the matter in the financial statements.”
However, Deloitte doesn’t say if it went through all these processes. In fact, Rajan holds the view that it may not be appropriate to apply SA 560 in such cases. “To qualify as a ‘subsequent event’, the event (crisis at the National Spot Exchange, in this case) should have occurred between the date of the financial statements (March 31) and the date of auditor’s report (May 30). The financial crisis at NSEL was reported after July 31.”
A warning
Deloitte’s communication, however, has been a warning bell to investors, says Santhana Krishnan, Managing Partner of Sridhar and Santhanam. “It is good that the auditors have issued this statement now, it alerts investors that something is wrong with the financial statements. Once the financial statements are prepared and sent, investors may get carried away by them, if they aren’t alerted to subsequent events.”
However, there is one point in favour of Deloitte -- they were forced to react after the auditors of FTIL’s subsidiary — NSEL withdrew their audit opinion last Saturday. NSEL is a 99.9 per cent subsidiary of FTIL. The scam surrounding NSEL’s commodity contracts came to light in July this year. A holding company’s auditors take the audit reports submitted by the auditors of the subsidiary company at face value.
Weak arguments
FTIL in a press release said that, the company’s financial statements “may undergo amendment,” after the auditors’ communication but argued that “the impact on account of NSEL is not material in the standalone financial statement.” Given that NSEL is a 99.9 per cent subsidiary of FTIL and without the former FTIL’s consolidated earnings will be over 55 per cent down, is small comfort to FTIL’s investors.