Why Deloitte has not Signed Byju's Financials for 2020-21 Even After 15 Months

 #suprioghatak #byjus #deloitte #revenuerecogntion #accountingstandards 

Deloitte has not signed Byju's financial statements for 2020-21. They have not submitted the financial reports for 2021-22 also.

While Byju's dismissed concerns, if it fails the acid test, it could horrify the entire $3.5 B Indian edtech industry, seasoned investors, upcoming founders included.

What is the problem with Byju’s finances? Are they inaccurate?

Byju’s is late in filing. Next, its books may reveal several discrepancies. Let's have a look.

Accounting issues, troublesome lending arrangements and a constant need for cash are playing simultaneously.  

The reported numbers seem to be distorted for more reasons than one. Bundling hardware like memory cards and tablets in its revenue calculations may have been done to inflate them. They accounted for 63% of its revenue in 2020 with an annual increase of 55%.

Byju’s and its controversial subsidiary WhiteHat Jr draw loans to keep prices affordable and offer a 100% default guarantee to lending partners. This risky practice is disliked.

Byju's says securitization and First Loss Deposit Guarantee (FLDG) are accepted industry practices. If not for FLDG, the majority of consumer parents would not be able to raise personal loans from banks and financial institutions at affordable rates.

Byju’s says that the late filings are not a cause for concern.

Valued at a colossal $22 B, Byju’s has raised over $6 B in its 12-year existence. It has expanded to new countries including the UK, Australia, Brazil, Indonesia, and Mexico. Revenues are not even $1 B. Ideally, the revenue multiples in the edtech space, 19x for larger companies, should be at least $1 B.

It has been on an acquisition splurge since the pandemic, embracing not just e-learning companies but professional skilling and augmented reality start-ups. It is eyeing a public market debut at a massive $48 B valuation soon.

The delay is not a red flag, it said. These numerous acquisitions are being examined thoroughly and the lack of audit bandwidth for the company has scaled up rapidly. Within a few days we can actually see that report.

Byju's made at least 10 acquisitions for a cumulative transaction value of around $2.5 B in 2021.

It has completed the consolidation of businesses and will be filing its pending financial results in June.

This response comes after The Ken reported that Byju's has not filed its financial statements for 2020-21 and 2021-22 as auditor Deloitte is hesitant to put its signature due to problems in refunds, loan guarantees and unusual revenue recognition practices.

Byju's says that they follow the highest standards in all business practices from student success to governance and accounting standards. These practices have been in operation for the last six years, have been audited by Deloitte, and records are submitted to all relevant authorities over these years.

Attributing the delay to a series of acquisitions made by Byju's in 2020 and 2021, they reiterate that multiple acquisitions were made in 2020-21 and each had a different accounting style and year. They have completed the consolidation of businesses and will be filing their financial results this month.

How Byju's records its revenue from sales of hardware (memory cards, tablets etc.) and software (apps and online classes) could have caused a discrepancy in the edtech firm’s financial statements.

Loan guarantees are the second issue highlighted. Byju's offers a 100 percent default guarantee to some lending partners that make loans to its customers. Such guarantees are called First Loss Default Guarantees (FLDG). If the customer fails to repay, Byju’s foots the bill, out of its own books or by raising cash from private investors.

It said that working with lenders that help consumers finance a course lies at the heart of what allows Byju’s to book revenues in advance.

So far, Byju's has raised over $6 B in funding, with the founder Byju Raveendran pumping $400 M in its leading the latest $800 M funding round at a valuation of $22 B in March 2022.

The refund guarantees offered by Byju's and its subsidiaries could create pain points if the actual refunds far exceed the budgeted amount.

Byju's is looking to go for an IPO in the US through the SPAC route. Hence, Deloitte could be taking a cautious stand.

Now the Indian edtech space is reeling under the bad weather of the funding winter, causing at least two start-ups to shut operations - Udayy and Lido Learning.

Edtech unicorns Vedantu and Unacademy have laid off over 600 employees each. At least 800 employees have resigned at Byju's owned White Hat Jr. The total edtech layoffs have crossed 3,500 over the last two months.

Conclusion

With these practices, Byju Ravindran's own standing as a founder is at stake as recently founders like Ankiti Bose and Ashneer Grover were shown the door for false revenue reporting and accounting.

A few million dollar questions remain to be answered

Why has Deloitte signed the previous financial statements and held off this time?

Why have the investors been investing so much money in a start-up like Byju's?

Please read Part-2 and Part-3 

About Author

CA Suprio Ghatak

Qualification: The Institute Of Chartered Accountants Of India

Company: J K V S & CO, Chartered Accountants

Location: Kolkata

About Author :

I am a Partner at J K V S & CO. I look after Recruitment, Training and Development. I am working here since May 2017.I also look into all ICAI related matters of the firm.

PwC UK ordered to pay fine of £ 5M over audits of London-listed construction groups

#pwc #pwcuk #frc #penalties #auditfailure #regulatoryaction #bigfour

PwC UK ordered to pay fine of £ 5M over audits of London-listed construction groups

Financial Reporting Council (FRC), the UK regulator has ordered penalties to be paid by PwC UK for their failures on accounts of Kier and Galliford Try. PwC’s work was not of the required standard.

PwC UK has been fined twice in a day by Financial Reporting Council (FRC) over audit failures of the two London-listed construction groups.

It was ordered to pay £5 M after Financial Reporting Council (FRC) found problems in both the audits. The companies have been hit by accounting errors in the recent past.

Financial Reporting Council (FRC) found severe problems with PwC’s audit of long-term contracts in these two companies, including recognition of revenue and costs on large contracts at Galliford Try.

The fines are the latest regulatory action over audits in the construction and outsourcing sectors, where accounting treatment of multiyear contracts and validity of assumptions made by company management in preparing the accounts are key issues.

Meticulous audit of long-term contract accounting is very important in construction companies, where many contracts are spread over a number of years. That’s what Claudia Mortimore, Financial Reporting Council (FRC) deputy executive council said.

Auditors must ensure they obtain sufficient appropriate audit evidence to support accounting of the contracts as well as apply sufficient professional scepticism. This is indispensable to allow investors to have confidence in the financial statements.

PwC UK was ordered to pay £ 3M for failing to meet the regulatory requirements in its audit of Galliford Try’s accounts for 2018 and 2019. The penalty was reduced from £ 5.5M in recognition of its co-operation. 

Financial Reporting Council (FRC) said PwC had not done enough to challenge declarations made by Galliford Try’s management, which was found in 2020 to have overstated its assets by £ 94.3M.

A further penalty of almost £ 2M was ordered, reduced from £ 3.35M, for its audit of Kier’s accounts for the year ended June 2017, when it failed to find errors in the company’s income and cash flow statements.

In both the companies - Galliford Try and Kier, PwC had not shown suitable professional scepticism and failed to gather sufficient audit evidence in its audits.

PwC UK agreed to pay more than £ 756,000 to cover the cost of the two FRC investigations.

Jonathan Hook, the partner who led the audits of both companies, was given two fines totalling more than £ 135,000. He retired from PwC UK in 2021. Both Hook and PwC UK were given severe admonishment by FRC.

PwC UK  had invested a lot in improving audit quality, including long-term contracts, since the audits of Kier and Galliford Try.

Financial Reporting Council (FRC) instructed PwC UK to review its audits of listed companies, where long-term contracts are widespread and to report to FRC on the results. PwC received the best score out of the Big Four accounting firms in FRC’s most recent quality inspections.

Financial Reporting Council (FRC) investigations into PwC UK’s audits of Kier and Galliford Try are the latest regulatory actions against auditors of UK-listed contractors.

Deloitte was ordered in April 2022 to pay a fine and costs of more than £ 2M for audit failures at Mitie, while Grant Thornton LLP (US) was fined £ 700,000 in November 2021 for problems with its review of the accounts of Interserve, which became insolvent in 2019 and entered the legal process.

Financial Reporting Council (FRC) is also investigating KPMG UK for signing off the accounts of outsourcer Carillion before it went into liquidation, and mid-tier (read medium sized) firm BDO UK LLP over its auditing of NMCN, a London-listed construction company that went into liquidation in October 2021.

Financial Reporting Council (FRC) in January 2022 was probing PwC’s work at defence contractor Babcock, which has also disclosed accounting errors in recent years.

Financial Reporting Council (FRC) is also reviewing PwC UK's audits in other sectors, with investigations under way into its audits of BT, Eddie Stobart Logistics, collapsed minibond company London Capital and Finance and Wyelands Bank, owned by steel tycoon Sanjeev Gupta. 

To be continued

KPMG fined £3.4M over Big Failures in the 2010 Rolls-Royce audit in UK

#kpmg #frc #rollsroyce #bigfour #noncompliance #criminalinvestigation 

KPMG fined £3.4M over Big Failures in the 2010 Rolls-Royce audit in UK 

The Financial Reporting Council (FRC), independent regulator in the UK and Ireland, responsible for regulating auditors, accountants and actuaries, and setting the UK's Corporate Governance and Stewardship Codes, says KPMG’s audit of Rolls-Royce PLC, major British manufacturer of aircraft engines, marine propulsion systems, and power-generation systems, failed to report payments to Indian intermediaries. 

KPMG will pay a fine of £3.4M to FRC after accepting failures in its audit of Rolls-Royce, Britain’s most prominent aerospace and defence manufacturer, that paid a £500M settlement after bribery allegations. 

KPMG received a severe rap over the knuckles from FRC, and will have to assign an independent review into the efficacy of its policies.

KPMG has been fined £3.4M by FRC for serious failures in its audit of Rolls-Royce’s 2010 accounts, five years after the engine-maker reached a settlement with authorities over corruption allegations. 

It is the fourth significant fine KPMG has paid this year.

Anthony Sykes, the KPMG partner who led the audit, will also pay a £112,500 fine and received a severe rap over his knuckles ahead of his retirement from KPMG in September. The fines for KPMG and Sykes were reduced from £4.5M and £150,000 respectively as they cooperated with FRC. KPMG will also pay FRC’s costs for the investigation.

The series of scandals of the Big Four continue and this is the latest. All have been fined millions of pounds for audits that had significant inadequacies.

Poor quality audits have been blamed from collapsed construction firm Carillion – for which KPMG was this month fined £14M – to retailer BHS, for which PwC was fined £6.5M. KPMG has also been fined this year in the alcohol distributor Conviviality and Revolution Bars.

Rolls-Royce agreed to pay £671M in penalties in 2017 after prolonged investigations into bribes it paid for export contracts, including £500M in UK and other payments in US and Brazil. The charges in the deferred prosecution agreement included false accounting and conspiracy to corrupt.

FRC says, bribery and malpractice through intermediaries and advisers in the defence field were prominent at the time of audit, and KPMG should have known it as it was auditing another defence company which paid a large fine to settle a criminal investigation.

FRC said KPMG had failed to deal properly with Rolls-Royce which was not complying with legal requirements in relation to payments of agents in India.

The serious failures highlighted by the FRC related to two payments – £3.3M and £1.9M – made to Indian intermediaries.

KPMG was aware in July 2010, but did not include them in the audit report. Sykes also instructed a manager to remove a paragraph referring to them from minutes.

FRC says that KPMG failed to exercise professional scepticism and did not obtain sufficient audit evidence and document this on the Rolls-Royce audit file. Its quality control was substandard.

Claudia Mortimore, the deputy executive counsel to the FRC, highlighted the need for accountants to question their clients’ assertions. 

“It is essential that auditors are alive to the risks of companies’ non-compliance with laws and regulations, and conduct work in this area with care and sufficient professional scepticism,” she said. “This is particularly so when the audited entity is in a sector where such risks are known to be prevalent.”

To be continued