Common traits in FTX & Byju’s

In early November this year, Sam Bankman-Fried was found guilty of seven criminal charges including fraud against customers and lenders and money laundering, and now faces 115 years in prison. Until a year ago, 31-year-old Bankman-Fried was flying high, running the second largest crypto trading platform and was perceived as the messiah and spokesperson of the crypto industry.

The way the house of cards came crashing down is well-chronicled — How Binance pulled the rug from under Bankman-Fried’s feet, the collapse of FTT (the crypto token issued by FTX), investors in Almeda Research and FTX losing millions of dollars, collapse of Silicon Valley Bank and assets of the entire US banking system coming under a cloud. But the focus of this article will be the appalling lack of basic bookkeeping and controls in the company and how this wasn’t questioned by the regulators or its marquee investors.

The investigative report of creditors of FTX is stinging in the way it captures the chaos within FTX, “The FTX Group was tightly controlled by a small group of individuals who showed little interest in instituting an appropriate oversight or control framework. These individuals stifled dissent, commingled, and misused corporate and customer funds, lied to third parties about their business... and thereby caused the FTX Group to collapse as swiftly as it had grown. While the FTX Group’s failure is novel in the unprecedented scale of harm it caused in a nascent industry, many of its root causes are familiar: hubris, incompetence, and greed.”

The last three words resonate in the saga unfolding in Byju’s, the Indian edtech start-up. While the scale of operations and exposure to the banking system may not be as big in Byju’s, the attitude of the founders of both companies is similar. Both companies have shown lapses in financial record keeping and lack of proper governance while managing to dupe their investors in to believing in their story.

Basic bookkeeping absent

When Federal investigators began scrutiny of FTX and its group companies, basic accounts which even the smallest of businesses need to maintain were found absent.

The creditors’ report states that 56 entities in the FTX Group did not produce financial statements of any kind. Thirty-five of the group companies used QuickBooks (an online accounting software for small businesses) and ‘relied on a hodgepodge of Google documents, slack communications, shared drives, and excel spreadsheets and other non-enterprise solutions to manage their assets and liabilities.’ This was far from suitable for a business group dealing in securities, fiat currency, and cryptocurrency worth billions of dollars across continents.

The shocking part is that Bankman-Fried and his close associates found their their incoherent processes funny. In an internal communication, Bankman-Fried described Alameda as “hilariously beyond any threshold of any auditor…. we are only able to ballpark what its balances are, let alone something like a comprehensive transaction history. We sometimes find $50m of assets lying around that we lost track of; such is life.”

The chaos in Byju’s

We have not heard such irresponsible statements from Byju Raveendran, but the account keeping at Byju’s also leaves a lot to be desired.

The company projected revenue of ₹4,400 crore for 2020-21, but when the audited results were released after an inordinate delay in September 2022, the revenue for the year was ₹2,280 crore, with loss of ₹4,588 crore. While this was attributed to changes in the method of revenue recognition, the results of the group for 2021-22 were once again inordinately delayed. In fact, only the results of the parent, Think and Learn, have been declared so far. The audited accounts for 2021-22 should have been filed by September 2022.

There has been a lot of drama around the results for 2021-22 with the auditor, Deloitte Haskins and Sell, resigning in June this year stating that the firm was not allowed to commence audit of the financial statements for 2021-22 despite several letters to the Board. As if that was not enough, the CFO, Ajay Goel, also resigned recently.

This follows a spate of other exits including three of its directors, representing Sequoia Capital, Chan Zuckerberg Initiative and Prosus, and two of its top executives, Asheesh Sharma and Surendra Pandey.

These exits and the delay in finalising the results together show serious governance lapses and unwillingness on the part of professional managers to be associated with the company.

Not good supervisors

One would think that presence of top-notch PE and VC investors in a company would ensure good management and governance. But this appears to be a fallacy. FTX’s investors included Tiger Global, Temasek and Ontario Teacher’s Pension Plan. But none of them objected to the lack of processes and controls in FTX.

A report in Financial Times quoted Alfred Lin, partner at Sequoia Capital, saying, “Immediately after FTX collapsed, we extensively reviewed our due diligence process and evaluated our 18-month working relationship with Sam Bankman-Fried. We concluded that we had been deliberately misled and lied to.”

The investors in Byju’s have pre-empted such embarrassment by resigning from the Board.

Lessons from the saga

The FTX episode as well the ongoing problems with Byju’s show that the supervision of private companies needs to be much stricter.

In India, these companies are expected to file audited accounting statements six months after the end of the financial year. But delay in doing so is not dealt with in a stringent manner. In Byju’s case, the Serious Frauds Investigation Office is reported to have commenced looking at the company. CA Institute’s Financial Reporting Review Board is also reviewing the company’s FY20 and FY21 accounts. But this is far from enough.

The larger private companies need more supervision to retain credibility in the eyes of foreign investors. MCA needs to formulate rules requiring more frequent (perhaps, half-yearly) disclosures of financial performance, changes in ownership pattern, etc., for two categories of private companies. One, companies with turnover exceeding ₹1,000 crore and, two, companies which have raised PE and VC funding of more than ₹1,000 crore.

The time given for filing audited results for such companies also needs to be reduced to three months from the end of the accounting period. This will ensure that the companies pay attention to basic accounting practices, which is the cornerstone of coherent business development.

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