Trouble at Ricoh: a lot like Satyam

Evidence of accounting shenanigans at Ricoh India, the Indian arm of Japanese multinational Ricoh Global, have been tumbling out of the closet for 18 months now. This week, the market regulator passed an order restraining six (current and former) top managers of the company from dealing in the securities market and ordered forensic audits of its past financials.

True, as a ₹1000-crore company dealing in copiers and digital printers, Ricoh India isn’t a Nifty 50 company tracked by an army of analysts. With its parent owning 73.6 per cent shares, the company features no marquee institutional investors. Nor did Ricoh’s key managers, when cornered, write a public confession letter on the perils of riding a tiger. But this lack of drama doesn’t make the accounting shenanigans at Ricoh India any less sensational than those at Satyam Computers, nine years ago.

SEBI’s order offers a blow-by-blow account of the ease with which the company’s executives managed to pull the wool over the eyes of investors, analysts, the stock exchanges and rating agencies for many quarters.

Shooting to fame

Ricoh India — a listed company retailing digital printers and imaging equipment — attracted very little investor attention in the ten years to FY11. Despite growing revenues, forex fluctuations and wafer-thin margins on its retailing business led to the firm reporting losses in FY12.

But a decision by the management in 2012-13 to make a shift from hardware retailing to IT services saw the markets sit up and take notice of the stock. Even as the management set out fanciful targets to foray into cloud computing and end-to-end document solutions, investors latched on to Ricoh India as a newfound ‘Digital India’ play. Ricoh’s revenues quickly moved into fourth gear, shooting up from ₹633 crore in FY13 to ₹1638 crore by FY15, with losses (₹1.3 crore) turning into profits (₹33.9 crore) in a short span. This triggered a manic rally in the stock, which rose vertically from sub-₹100 in November 2013 to over ₹1,000 by June 2015.

It was at this high point that the company began to drag its feet on filing quarterly results. After scheduling a board meeting to approve its Q3 results in November 2015, the company pushed back the date several times, citing delays by its new statutory auditor (BSR & Co). By April 2016, the cat was out of the bag. The auditor had refused to sign off, citing financial irregularities and had recommended a forensic audit of the firm’s accounts.

Satyam syndrome

The forensic auditors (PwC) had a shocker to impart to Ricoh India’s shareholders. Once the irregularities were adjusted, the company reported a net loss of ₹1,117 crore on a topline of ₹998 crore for FY16. Write-offs relating to the fraud also completely wiped out its networth.

The company attempted to ring-fence the issue by asking its CEO, CFO and COO to go on leave (they later resigned), filing a police complaint and appointing new top managers, even as it escalated the matter to SEBI. The Japanese parent agreed to write off its equity, infuse new capital and promised a quick turnaround. But that turnaround proved elusive and the company has since approached the NCLT for bankruptcy resolution. Investors in the stock are in limbo as BSE suspended trading in it a year ago.

Deep-rooted rot

PwC’s limited-period forensic audit for FY16 has unearthed wide-ranging attempts to cook the company’s books. It has found that the company had made “unsupported out-of-book adjustments” to net sales, expenses, assets and liabilities, converting losses into profits.

In a strange accounting practice, Ricoh had recognised product sales without any delivery, and service revenues without completing projects. Sales were shipped to parties with non-existent addresses. There were the suspect back-to-back transactions, where sales to one entity doubled back to Ricoh as purchases. Such deals made up a good 71 per cent of the revenues from the hyped-up IT services business. Mounting receivables led to rising debt too. Ricoh’s former executives, it is alleged, received personal favours such as sponsorship of foreign trips, from these “clients”.

While details are at hand on how the fraud was perpetrated, the whys of it remain shrouded in mystery. Were cooked-up sales used to siphon off company funds? Were stock prices rigged to benefit the key managers or punters?

Given the lack of answers, it is not surprising that SEBI is now pursuing the investigation further by conducting a forensic audit into Ricoh’s past financials from FY13. If it unearths more irregularities, the erstwhile management, the promoter and several former employees may all come under suspicion and invite harsher penalties.

Hard lessons

Whatever the outcome, the Ricoh saga also offers some painful lessons for retail investors. It tells us that the halo of good governance that Indian investors automatically bestow on MNC stocks is unjustified. MNCs, it is clear, are just as vulnerable to crooked managers, shoddy processes and dubious related-party deals, as home-grown companies. High promoter skin-in-the-game (a 74 per cent shareholding in Ricoh’s case) doesn’t guarantee good behaviour or promoter involvement in the company’s affairs either.

The story of this small-cap is also a good cautionary tale on how easy it is to drum up fancy investment arguments for a doubtful business in a frothy market.

What has changed?

The most dismaying part of the Ricoh India saga though, is its striking similarity to the Satyam Computers fraud. In the nine years since Satyam, Indian regulators have made umpteen attempts to tighten the corporate governance framework for India Inc. Based on recommendations from multiple committees, there’s now a rebooted Companies Act (2013) and a new set of SEBI LODR Regulations.

But these clearly haven’t managed to foolproof Indian shareholders against accounting fraud. For starters, the comprehensive cooking of Ricoh’s books is unlikely to have occurred without complicity or sheer negligence on the part of the auditors. SEBI has named the company’s internal auditor in its order. But what of the statutory auditors — M/s Sahni Natarajan and Bahl — whose termination opened up this Pandora’s box? They held office for 15 years before the company decided to replace them to comply with rotation rules in the new Companies Act. In fact, given the deep-rooted rot in this case, one wonders if the ten-year audit rotation rules are too liberal.

Two, current governance regulations rely heavily on the independent directors on a company’s board to ensure stringent oversight. But Ricoh India was fully compliant with these diktats. The company had more than the required quota of independent directors (four out of seven) on its board. They also manned the audit committee.

Three, early detection is critical to bringing the perpetrators of any fraud to book. In Ricoh’s case, the inordinate delay in results filings should have immediately alerted the stock exchanges, SEBI and rating agencies. But Ricoh’s bonds actually earned a rating upgrade, BSE restricted its penal actions to suspending trading, and SEBI initiated its investigation only a year later.

The only way for SEBI to now restore some confidence would be to pursue this investigation on a war footing and immediately impose strong penalties on both the internal and external perpetrators of this fraud. One hopes that, on this count at least, the Ricoh India saga turns out to be materially different from the Satyam story.

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