Opinion

Satyam 2.0?

Mohan R Lavi | Updated on January 17, 2018 Published on August 03, 2016

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The Ricoh row exposes flaws in Companies Act

After Satyam happened, most people wrote it off as a one-off accounting accident. After Sahara happened, most people blamed the gloated greed of one individual that would be hard to replicate. In response to these scandals, the Government introduced a draconian Companies Act with a clear warning to companies that if they cook their books, the Act would book the cooks. To restrain companies from financial irregularities, the Act has provisions so stringent that they read like the Indian Penal Code. Despite this, Ricoh has come into the limelight in what could be an encore of Satyam.

What’s with Ricoh?

For the quarter ended June 30, 2015, Ricoh turned in a moderate profit. Abiding by the provisions of the Companies Act on rotating auditors, Ricoh appointed a new audit firm. The new auditors were taking their time in presenting their report for the quarter ended September 30. The company kept apologising to the BSE for the delay in complying with the Listing Agreement, but soon announced that there were some accounting issues and a forensic audit was being done.

The forensic audit report would bring back memories of Satyam — unsupported, out-of-books’ adjustments were made to net sales, expenses, assets and liabilities to report higher profits or to cover previously unreported losses.

Revenue was recorded based on orders in hand or on invoicing without dispatch/delivery of goods, which may not comply with accounting standards. Substantive back-to-back purchases/sales transactions with no value addition, and unsupported and backdated transactions were recorded in the books of account. There was a nexus between the company’s key managerial personnel, vendors and customers. In some cases, customers had bogus addresses and enjoyed undue favours of payment and other arrangements have been given to certain vendors and customers. In some cases, non-existing products were sold.

Naturally, the new auditors refrained from giving an opinion on the financials of Ricoh as well as its ability to continue as a going concern. The numbers for September reflected significant losses. Now, Ricoh’s Japanese parent has stepped in with an assurance to compensate for the losses and take remedial action. At the behest of minority shareholders, an extraordinary general meeting was convened this week.

Walk the talk

That Ricoh occurred despite the provisions of the Companies Act should come as no surprise. The Act talks enthusiastically about imprisonment and fines, but no such penal action was taken against companies. Ricoh provides an opportunity for the corporate affairs ministry to walk the talk. The ministry should do this before multiple agencies step in to contribute their mite to the probe.

This incident will reignite the debate about the role of auditors. A cursory look at the nature of the irregularities reported suggests only an extremely careless and happy-go-lucky auditor would have not noticed the deviations.

However, rotation of auditors is not the magic pill to resolve all accounting accidents. Stringent action against erring auditors can probably dissuade many from not reporting what has to be reported.

Like terrorist attacks, accounting accidents are becoming a part of life. The saving grace is that the frequency of accounting accidents does not match those of terrorist attacks.

The writer is a chartered accountant

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Published on August 03, 2016
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