The ministry of corporate affairs has asked the Registrar of Companies (RoC) to submit a detailed report under Section 234 of the Companies Act seeking an explanation from Adani Exports (now known as Adani Enterprises) for its financial statements for the year 2004-05.
The MCA, in a letter written last month, also asked the RoC to examine the issues raised by the Institute of Chartered Accountants of India (ICAI) pertaining to certain accounting irregularities in the financial statements of Adani Exports for the year ended on March 31, 2005.
The MCA letter to RoC follows a report submitted by the Financial Reporting Review Board of the ICAI in which it has drawn the attention of the MCA to certain accounting irregularities in these financial statements. Section 234 of the Companies Act gives powers to the RoC to call for information or explanation from a company on a given matter through a written order.
A spokesperson for Adani in an emailed response said, “We have not received any communication, hence cannot comment.” As per the ICAI note, during the year, balances in receivables/ advances — which are long outstanding amounting to Rs 68.16 crore (previous year’s Rs 39.17 crore), net of recovery — have been identified as recoverable. The determination of this balance of written-off amount is based on evaluation of individual balances, current economic conditions, viability and other factors and reflects the amount which, in management’s judgment, is not recoverable.
Accordingly, the above amount in respect of outstanding dues representing transactions effected in past years during normal course of business has been debited to the profit and loss account. An equivalent amount has been withdrawn from the general reserve to offset this charge, as it pertains to past years.
The review board noted that the company has netted off the bad debts to the extent of Rs 68.16 crore. Such bad debts have been expensed by reducing an equivalent amount from the general reserve and the net impact in the current year is shown as nil.
The board was of the view that such an adjustment of bad debts from the general reserve should have been stated below the line. The company has overstated its profit in the prior period adjustments by Rs 68..16 crore by adopting the aforesaid practice. Such overstatement has also affected EPS disclosure.
It may be mentioned that from the information contained in the annual report, it is apparent that a similar practice had been adopted by the company in the previous year.
The ICAI report also said it did not agree with the opinion in the statements “that there is neither more than one business segment nor more than one geographical segment” and hence segmental information as required under AS 17, should have been disclosed. Adani Exports reported total sales of Rs 13,417 crore during the year.
The ICAI also noted that the annual report note on sundry creditors, receivables and loans and advances was ambiguous and the auditor seems to have relied on the management’s version and appropriate evidences like confirmations seems to have not been obtained for his satisfaction.
It also said that the nature of prior period items pertaining to debts and credits has not been disclosed which is a requirement of AS5. According to the ICAI annual report, the ICAI has constituted the Financial Reporting Review Board (FRRB). For financial year 2004-05, 53 companies were selected by the Board for review.