If an auditor which does NOT audit 80% of the company’s revenue and close to 100% of its assets, will it still be considered its true auditor. From an absolute number perspective, Assets and Revenue which was not audited by the Motherson Sumi’s main auditor was INR 60,752 crs and INR 50,541 crs respectively for FY 2019. I am no auditor, but this rubber stamping puts me at unease. Its liking sticking one’s neck out and putting your name behind the numbers basis what the management and other auditors have shared. Hopefully, the numbers being provided can be relied upon, especially when there are 74 subsidiaries, 3 JVs and 1 associate involved laced with multiple acquisitions!! I Really hope so!! Well, this becomes more bizarre when some numbers are UNAUDITED.
For FY 2019, 61 subsidiaries reflecting total asset size of INR 13,100 crores and revenue of INR 639 crores was UNAUDITED!! 30% of the company’s assets remain UNAUDITED.
Hence, a large portion of the assets and revenue have been either been audited by other auditors or they remain unaudited, the numbers have been ratified basis what the management has indicated.
Now, this is like a kid who is given a jar full of cookies and being asked to report only the cookies which he has eaten? What do you think will happen? Need I say more?
Couple of thoughts around this:
# Had this been a one-off, perhaps one could have given benefit of doubt to the management and the auditors, however, lets also not forget that even a tiny hole sinks a gargantuan ship!!
This pernicious rubber-stamping practice dates back to FY 2005 (at least the company’s website puts out annual reports dating back to this period thankfully). Back then, the amount was much smaller, viz. total assets of INR 146 crores and total revenue of INR 256 crores which remained relied upon by the auditor. From a relative standpoint, this translated to 25% of the company’s assets and 30% of its revenue – the main auditor was relying on some other auditors for basing their judgement. That’s quite an arrangement!!
Over the course of time, the numbers only got bigger and snowballed into a hedonistic treadmill, thereby resulting in increasing audacity by the stakeholders
# For the first time in FY2013, the main auditors even okayed the numbers which were not even audited and gave their sign-offs (obviously with caveats), just on the basis of what management shared with them. The bond between them perhaps really became stronger over the years, because until then, the main auditors at least were relying on audited numbers of some other peers. Now, from this year onwards, the envelope got pushed really hard!! This year marked the beginning of the practice of reliance on unaudited numbers as well.
# In FY2017, with the change in guard of the auditors, the practice still persisted. The unaudited and the reliance on other auditors kept increasing. While Motherson’s revenue has grown at a CAGR of 36% p.a. since FY2005, thanks to multiple acquisitions, audit fees has been neck-to-neck with the company’s revenue and increased from INR 35 lacs in FY2005 to INR 15 crs, thereby generating a CAGR growth of 31% over the same period.
After all, who wants to slice the golden goose. As long as revenue continues to grow, and the numbers keep showing up – no one’s complaining!! Life is great!!
While the management and the auditors continue to live happily ever after, hope no other stakeholder is caught naked when the tide runs out.
Disclaimer: Please note that these are my personal views. While, I am NOT a registered Research Analyst as per SEBI (Research Analyst) Regulations, 2014, all investors are advised to conduct their own independent research into individual stocks or industries before making any decision. In addition, investors are advised that past stock performance is not indicative of future price action.
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