From alarm to alarming to panic: Byju's and its auditing lessons

Byju’s, reckon industry observers and accounting analysts, is fast slipping from an alarming to a panic state. Auditors resigning by citing their inability to process audit and not get access to data is a huge loss of face and credibility for Byju's. “It is a panic situation for the company and its auditors,” says Shriram Subramanian, founder of InGovern, a corporate governance advisory firm. The board, he underlines, is much to blame for the mess and the resigning directors also share equal blame. “Delay in FY22 and FY23 and some modifications pending for FY21 cannot be justified at all,” he says, adding that last year, Deloitte got a lot of flak for coming up with a delayed audit report. “This year, too, the shocking trend continues,” he says.    

What Happens When Auditors Resign?

But why do auditors resign mid-way? And what does it mean for a company, and the investors?

Before we understand the related structure, let’s find out why the foundation principle of having a robust and factual accounting system is something that can’t be compromised or diluted. One of the best reasons was outlined by Isaac C Hunt Jr in 2001. The then commissioner at US Securities and Exchange Commission pointed out a worrisome trend in financial reporting. Current market conditions, he underlined, have increased the pressure on companies to meet past or projected earnings levels. “As a result, some managers have engaged in manipulation or ‘smoke and mirrors’ to enhance their companies’ earnings and, in turn, the companies’ share prices,” he pointed out. When such chicanery is discovered, the resulting and inevitable restatements of earnings have caused investors to lose billions of dollars, and confidence in the market. The challenge for accounting professionals, he concluded, was to maintain high-quality financial reporting.     

Back in India, high-quality financial reporting is something that is still largely missing in a large number of listed and unlisted companies. Apart from Byju’s, there have been a few cases of auditors stepping down.

For instance, in May the statutory auditor of Adani Total Gas resigned. A month later, Atlas Jewellery’s auditors resigned over corporate governance issues. In the resignation letter, the auditors—Tarun Kandhari & Co—pointed out that their appointment was for a period of one year (FY2021-22), starting from the end of the 31st annual general meeting (AGM) till the next one scheduled in 2022. “Due to the prevailing circumstances within the company, the AGM could not be conducted, and to date, no clarification has been provided regarding its status,” the auditors wrote, pointing out that they also noticed an ‘imbalanced board and absence of an audit committee within the company’. “This raises concerns regarding corporate governance and regulatory compliance,” they added.

“Mid-term auditors’ resignations are always a red flag and do not augur well in terms of corporate governance and transparency of the company. When an auditor walks out mid-way, it indicates that something is amiss,” says Pranav Haldea, managing director, Prime Database Group.  

According to market regulator Securities and Exchange Board of India’s (Sebi) mandate, a listed company is required to release quarterly results within 45 days and annual financial results within 60 days of the last day of the period. “While Byju’s is an unlisted company, in terms of valuation and size it would be larger than several listed companies. Considering Sebi’s regulations as a benchmark, delaying financials by over a year thus does raise concerns,” Haldea adds.  

"When auditors resign, corporate governance feels the resounding crack," says Piyush Sharma, who heads the leadership centre at IIM-Ahmedabad.  He adds that auditors often resign from companies mid-way, signalling alarming breaches of integrity and governance. Independence concerns, ethical dilemmas, and disagreements on accounting practices can lead auditors to step down, safeguarding their professional credibility. Inadequate resources, lack of support, and loss of confidence in management further contribute to their resignations.  Legal or regulatory concerns, such as potential violations, may also prompt auditors to disassociate themselves from the company.  

The Akaash IPO Question

Coming back to Byju’s, an inordinate delay in filing financials for FY22, forget FY23, raises question on the initial public offering (IPO) of Aakash. Bought for $1 billion in 2021, Aakash was set to go public next year. Perhaps the only silver lining for Byju’s, Aakash has been a robust and profitable story. The operating revenue increased from Rs 327.7 crore in FY14 to Rs 1,214.1 crore in FY20. After a slight blip in FY21—due to the pandemic hitting offline-heavy Aakash—the numbers rebounded strongly to Rs 1,250 crore in FY22, and over Rs 3,000 crore in FY23. Now with a new auditor in place, will the accounts be ready in time to hit the IPO market?

“Prospective investors in Akaash’s IPO would also want this current issue to be resolved along with a clear communication from the management about the delay,” Haldea says.

According to Sharma, Deloitte’s resignation poses significant challenges for the upcoming IPO prospects announced for Aakash. “This may disrupt the IPO timeline, erode investor confidence, attract regulatory scrutiny, and cause reputational damage. Aakash must take prompt remedial actions, improve transparency, and demonstrate a commitment to strong financial reporting to navigate these obstacles and maximise the potential of the IPO,” Sharma says. 

It has been a summer of discontent for Byju’s as a dip in online education coincided with the dawn of a funding winter. Byju’s, which reportedly spent over $2.4 billion in acquiring close to two dozen companies, started to cut costs to stem losses which had ballooned to Rs 4,564 crore in FY21. It reportedly laid off over 2,500 employees—around 5 percent of its headcount, started closing down its field sales centres across smaller cities, and paused its acquisition drive. To make matters worse, the company also saw a staggering markdown in its valuation by one of its backers. In June this year, US-based asset manager BlackRock, which owns under 1 percent stake in Byju’s, slashed the valuation by nearly 50 percent to $11.5 billion. Last year, Prosus, the Netherlands-based technology investor, valued its 9.67 percent stake in Byju’s at $578 million at the end of the September quarter.