The events unfolding at Brightcom Group have all the elements of a roller-coaster film. It commenced in April when SEBI issued an interim order and show-cause notice to Brightcom which asked a number of questions. In June, the Securities and Exchange Board of India (SEBI) passed an adjudication order against six entities of the group on issues of insider trading and other ethical matters.
In the same month, SEBI passed another adjudication order on similar issues. In August, SEBI passed an interim order in the matter of preferential allotments. In the same month, the Enforcement Directorate ( ED) conducted raids on the company.
Amidst all this action, the auditor of Brightcom obtained a ruling from the Telangana High Court that the National Financial Reporting Authority (NFRA) cannot investigate audits that were done prior to the constitution of NFRA.
Recently, Brightcom informed the stock exchanges that both its CEO and CFO have resigned. The Centre may take control of the company and and hand it over to someone who can possibly manage it better as it did the case of Satyam.
There is a good possibility that the Central Government would step in and do to Brightcom what they did with Satyam — take control of the company and hand it over to someone who can possibly manage it better.
Bank accounts again?
The interim order of the Telangana High Court attracted attention since NFRA had already investigated some audits done prior to their establishment. Section 132 (4) of the Companies Act and the NFRA rules were brought into play only from October 2018 and November 2018 respectively.
For example, the investigations conducted by NFRA on IL&FS pertained to years prior to October 2018. The final hearing on this matter will take place in mid-September. If the Telangana High Court maintains its stance, auditors whose audits were investigated prior to 2018 will heave a sigh of relief.
While Brightcom may get away for the financial year 2016-17, NFRA can still investigate their audits for later years since the governance and audit issues appear to have spread over many years. It would be interesting to see if the Telangana High Court changes its stance just because some of the observations raised by SEBI appear to be a repeat of what happened at Satyam — transactions appearing in the books but not in the bank statements.
Adding to the mystery was the fact that the transactions appeared in the bank statements provided by the Company but did not figure in the bank statements sought directly by SEBI!
For instance, warrants worth ₹38.50 crore were allotted by Brightcom to Aradhana Commosales LLP and appeared in the bank statements provided by Brightcom. SEBI could find only ₹2.41 crore in the bank statements they obtained directly. SEBI’s order lists many such instances.
The Telangana High Court relied on a decision of the Supreme Court in the case of Vatika Township which ruled that any legislation is to be applied prospectively unless it has been specifically intended to be applied retrospectively.
Post-Satyam, auditors insisted on direct confirmations from banks however small the balance in the account. Post-Brightcom, they may be tempted to report such non-confirmations in their report. The show-cause notice issued by SEBI in April had a few things to say on the Brightcom auditors’ non-compliance with accounting standards, non-disclosure about audits of branches, not having an independent rotation of auditors and involvement of the auditor in non-audit aspects of the company such as allotment of shares and investments made.
In the past accounting accidents such as Satyam, DFHL, Brightcom etc were seen as exceptions and not the norm. The orders being passed by SEBI/NFRA/PCAOB and other regulators may tempt us to think otherwise.
Two things appear to be certain from the auditors’ side — they will not take up high-risk audits and the content of their audit reports will have more masala in them.
The writer is a chartered accountant