Resignation of auditors is never good news and invariably raises eyebrows. Why would auditors resign when their audit reports have disclaimers and provide only a reasonable assurance? It would appear that auditors would resign only when accounting accidents (a more conservative term for material misstatements) have gone way beyond a tolerance limit that is present in every audit.

The recent resignation of the auditor of Byju’s is bound to raise the question of whether Byju’s is a bubble that is bound to burst due to their accounting and governance practices.

The erstwhile auditors resigned due to a long delay in finalising the financial statements for March 2022 and Byju’s not rectifying the comments made in the audit for the year ended March 2021. The announcement of the resignation and the appointment of a replacement was a good example of corporate-speak. Byju’s expressed its sincere gratitude to the outgoing auditors for their invaluable professional support over the last six years. It also announced the appointed BDO as the new auditor, adding that this will help it uphold the highest standards of financial scrutiny and accountability.

The meticulously planned transition timeline ensures a seamless integration of the new auditor into the existing audit framework, affirming a comprehensive and independent examination of Byju’s financial statements. The audit of most subsidiaries has already been completed, setting a positive precedent for the ongoing collaboration with the new auditors. BDO’s extensive experience working with multinational clientele underscores its expertise in navigating the complexities of consolidation, particularly relevant to Byju’s given its multiple global acquisitions in the past three years.

Audit coverage

BDO will cover the holding company, Think and Learn Pvt Ltd, its material subsidiaries such as Aakash Education Services Ltd as well as the overall consolidated results of the group. This comprehensive audit coverage will provide a holistic view of Byju’s’ financial performance and ensure transparency across the organisation.

Byju’s has seen every possible adverse news over the last couple of years — drop in valuations, qualified audit reports, legal disputes with lenders, multiple lay-offs and a missed debt repayment. The delay in finalising its financial statements could be due to having to correct its revenue recognition policies that were flagged in 2021. Any further reversal of revenue could lead to a further drop in valuations that would have a ripple effect on future funding rounds.

Byju’s started off well as an edtec start-up with a good business model and decent funding. In the course of time, it became popular, attracting private investors in the process. Fuelled by private equity and driven by the mantra of growth at all costs, the company diversified into multiple areas and went on an acquisition spree. Growth at all costs and corporate governance practices invariably clash with each other, forcing companies to prioritise one over the other. Byju’s appears to have opted for the former.

The incoming auditors would be well aware of what they are getting into and will de-risk themselves by making suitable comments in their audit report. The audit is only one of the issues that the management and investors of Byju’s need to focus on now. They would need to get together and work out a holistic solution to recover some of their lost mojo. This could mean having to divide their businesses into segments, hiving off segments that aren’t worth it, taking impairment hits in segments that don’t contribute to the cash flows, and putting in a best-in-class governance mechanism for the segments that remain.

In this process, they should not get tempted to maintain their valuations just to satiate investor appetite. Their focus should only be on cash flows.

The writer is a chartered accountant

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