One of the first documents that his bankers, Manufacturers' Bank, asked Mr Rusi Daruwalla when he approached them for a loan was for audited financials. This was sought more for the sake of the Auditor's Report than any other single reason. And why is that.The auditor represents the shareholders and it is his duty to report to the shareholders and the general public on the stewardship of the Company by the directors. Auditors are required to report whether the financial statements presented do, in fact, present a true and fair view of the state of the company. Bankers will go through the auditors report carefully as auditors are, to a degree, their representative and they are bound, and required by law, to qualify their statement if the financial statements are not true and fair.
The auditors are also required to report any change such as the changes in accounting principles or the non provision of charges that result in an increase or decrease in profits. It is really the only impartial report that theoutside public and the banker have access to and this reason alone makes imperative that he reads it carefully and analyses the report including if necessary reconstructing the financials in order to get the true facts and the state of the company's state of affairs.
There can be interesting contradictions which such scrutiny sometimes reveals. In one Auditors' Report it was stated: "As at the year end, the accumulated losses exceed the net worth of the Company and the Company has suffered cash losses in the financial year as well as in the immediately preceding financial year, in our opinion, therefore, the Company is a sick industrial company within the meaning of clause (O) of Section 3 (1) of the Sick Industrial Companies (Special Provisions) Act 1985."
The Directors' report however states, "The financial year under review has not been a favourable year for the Company as the computer industry in general continued to be in the grip of recession. High input costs as well as resource constraintshampered operations. The performance of your company must be assessed in the light of these factors. During the year manufacturing operations were curtailed to achieve cost effectiveness. Your directors are confident that the efforts for increased business volumes and cost control will yield better results in the current year." The auditors are of the opinion that the company is sick whereas the directors speak optimistically of their hope that the future would be better (they cannot probably do otherwise).
When reading Auditors' Reports the effect of their qualification may not be apparent. The Auditors' Report of another company reads "In our opinion and to the best of our information and explanation given to us, the said accounts subject to Note No 3 regarding doubtful debts, No 4 regarding balance confirmations, No 5 on custom liability and interests thereon, No 11 on product development expense, No 14 on gratuity, No 8, 16 (C) and16 (F) regarding stocks, give the information in the manner as requiredby the Companies Act 1956, and give a true and fair view - "It is necessary therefore to go to the specific notes. In this case,
Note 3 states that no provision has been made for doubtful debts. It is noted in note 4 that balance confirmation of sundry debtors, sundry creditors and loans and advances have not been obtained. It is stated that customs liability and interest thereon worth Rs 3,14,30,073 against the imported raw materials lying in the ICF/ Bonded gowdown as on the balance sheet date has not been provided in note 5. Note 11 draws attention to the fact that product development expenses worth Rs 17,44, 049 are being written off over 10 years from 1991-92. Rs 2,16,51,023 has been capitalised under this head relating to the development of CT142, digital TV, cooler, CFBT which shall be written off in 10 years. The company's share towards past gratuity liabilities as at the year end has neither been ascertained nor provided for except to the extent of premiums paidagainst LIC group gratuity policy taken by the trust. This is in note 14. Note 16C states that the raw material consumed has been estimated by the management and this has not been checked by the auditors.The company made a profit of Rs 1,07,51,537. If the product development expenses, customer duty and interest and provision for bad debts had been made as is required under generally accepted accounting principles, the profit may have turned into a loss.
It must be remembered that at times accounting principles are changed or creative, innovative accounting, is resorted to by some companies to show a better result. The effect of these changes are at times not detailed in the notes to the accounts. The Auditors' Report will always draw the attention of the reader to these changes and the effect that it has on the financial statements. It is for this reason that the careful reading of an Auditors' Report is not only necessary but mandatory on the part of the banker.
It is for these reasons thatBankers insist on the submission of audited results prior to the sanctioning of facilities. An external confirmation - an unbiased, impartial opinion of the financials is an absolute necessity.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
