While reading through the annual report of one of the listed company (TRF Ltd – A Tata Enterprise) in India my attention was drawn to a small paragraph in the ANNEXURE TO NOTICE - Explanatory Statements pursuant to Section 173(2) of the Companies Act, 1956. Although, the paragraph was concise but it provided enormous information on the company’s profitability.
Reasons for loss or inadequate profits:
The financial mis-statements were noticed in a particular division for earlier years. This was done by a group of officers who were discharged from the Company and Company has initiated necessary legal proceedings against them. A new team, who had taken charge of the division had reviewed the costs of the projects under execution and corrected the same where ever necessary. Consequently, the Company had to book losses in the division bringing down the overall profits of the Company.
This paragraph quite evidently mentions “mis-statements” by group of officers in a division. The company has initiated legal proceedings against them. Is it an indication by the company that money has been siphoned off by this group of officers or alternatively can we believe that the company has detected fraud in this division?
The highlights section in the annual report throws light on the profitability.
Consolidated PBT 2009- 10: 7,387 lakhs Rupees
Consolidated PBT: 2010- 11: 712 lakhs Rupees
Fall in profits by: 90.36%
The company has a functioning audit committee since 1997 which meets the representative of internal auditors (Big 4 company) and statutory auditors (another Big 4 company) regularly. To any one’s guess what is discussed regularly in such meeting with representatives of Big 4s.
The auditor’s report (Big 4 is a statutory auditor) states that:
Based on our audit and on consideration of the reports of other auditors on separate financial statements and on other financial information of the components, and to the best of our information and according to the explanations given to us, in our opinion the Consolidated Financial Statements give a true and fair view in conformity with the accounting principles generally accepted in India
Few questions which I do not know who will answer:
Did the auditors not detect the fraud when the company initiated legal action against a group of officers of a particular division?
Did the auditors not read the annual report of the company?
Did the auditors not find the drop in profitability compared to earlier year by 91% alarming and material?
What was the corporate governance from the audit committee’s perspective?
Who is answerable to the present shareholders of the company?
And finally;
HOW MUCH TRUE & FAIR WERE/ ARE THE FINANCIAL STATEMENTS AS OPINED BY THE AUDITORS?
For your reference and read as a case study of corporate governance link of the company annual report is attached.
