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How the Adani group worked

its way around a forensic
audit
An unnamed law firm’s clean chit and the
‘qualified’ opinions of its auditors help the
group give the lie to the charges levelled by
a US-based short seller.

Furquan Moharkan Delhi

18 May, 2023

Unlocked story

When Ahmedabad-based Shah Dhandharia &

Co. resigned as the statutory auditor of Adani
Total Gas on 2 May, barely a year after its
reappointment, it cited “increased
professional pre-occupation in other
assignments” as the reason for doing so. The
firm went on to add that “our resignation does
not result from an inability to obtain sufficient
appropriate audit evidence. There are no other
circumstances connected with our resignation
which we consider should be brought to the
notice of the Board.”

Yet, that very day, the audit firm had given a

“qualified” opinion on the company’s fiscal
2022-23 March quarter financial statement.
Two days later, on 4 May, the firm gave a
similar opinion on the financial results of
Adani Enterprises, the Adani group’s flagship.

The opinions themselves are a reaction to a

declaration in the financial statements of both
Adani Total Gas and Adani Enterprises,
triggered by the allegations made by US-based
short-seller Hindenburg Research:

“To uphold the principles of good governance,

the Group had undertaken review of
transactions referred to in the short seller's
report through an independent assessment by
a law firm. The review report confirms the
Group's compliance with applicable laws and
regulations.”

A similar declaration accompanied the

financial statements of some other Adani
group companies: Adani Power, Adani Green
Energy and Ambuja Cements.

This declaration, on the face of it, may seem

like the Adani group is acting on the
allegations made by the short-seller. Experts
don’t think so. “From a corporate governance
perspective, as we had pointed out in our
report of Jan 27th [which, among other things,
suggested better investor engagement and
increased equity fundraising by the Adani
group], the Adani group needs to be more
transparent and get a thorough review of their
CG practices done by independent firms,” says
Shriram Subramanian, founder and CEO of
proxy advisory firm InGovern.

The declaration in the financial statements is

not the only concern. There is a question mark
over the audits as well. The “qualified”
opinion given by the group’s auditors, on the
basis of the declaration, seems to lack an
adequate and independent application of
mind. Three different auditors have given the
same or similar opinion across five group
companies. That’s a remarkable coincidence.

Think of it this way. For months on end after

the Hindenburg allegations dropped, the
Adani group has been offering vague
assurances to the effect that it would conduct
some form of an independent assessment of
its companies’ accounts. None of that has
actually happened. In its place, it has put out a
declaration that a law firm has found
everything to be in order and followed up with
“qualified” opinions shared by its auditors. All
in all, the Adani group seems to be putting up
a facade of having followed best practices and
cleared itself of the charges in the Hindenburg
report.

So, the questions that arise are: Is the Adani

group in a hurry to give itself a clean chit and
are its auditors slipping in their fiduciary duty
to shareholders? In the process, are they
giving rise to the very corporate governance
concerns that the Hindenburg report flagged?
Let’s find out.

Questionable
independence
In Adani Enterprises’s financial statement,
Shah Dhandharia and Co. expressed a
“qualified” opinion on Note 8 of the
document. Such an opinion by a certified
public accountant indicates that the financial
results of a company are fairly presented, save
for a specific issue.

At this point, let’s fill you in on the types of

opinion auditors provide on a company’s
financial statements:

An unqualified opinion, which is

basically a clear report without any red
flags
A qualified opinion, which flags a
potential issue
A disclaimer of opinion, where auditors
distance themselves from providing
any opinion related to the financial
statement
An adverse opinion, which indicates
that a company’s financial statement is
misrepresented, misstated and does
not accurately reflect its financial
performance and health

In terms of severity, qualified opinions are the

least severe, while adverse opinions are the
most.

That said, what was the reason for the

qualified opinion?

“As described in Note 8 of the accompanying

[financial] Statement, management has
represented to us that the Adani group has
performed an internal assessment and has
obtained an independent assessment from a
law firm. However, pending the completion of
proceedings before the Hon’ble Supreme Court
and investigations by Regulators, we are
unable to comment on the possible
consequential effects thereof, if any, on this
Statement,” the auditor noted in the qualified
opinion.

According to a chartered accountant, who

closely tracks the Adani group and did not
want to be named, this was the bare minimum
that the auditor had to do to stay on the right
side of the law. “The Hindenburg report had
become too big for auditors to ignore. [Issuing
a qualified opinion] was the least they could
have done in such circumstances.”

This action leads to a bigger question: Is the

qualified opinion given by Adani Enterprises’s
auditor sufficient? Apparently not.

The qualified opinion doesn’t even meet the

basic statutory requirements set out by the
Institute of Chartered Accountants in India. In
its Standard of Accounting (SA)-705, ICAI says
that an auditor should express a qualified
opinion if he is unable to obtain “sufficient
appropriate audit evidence on which to base
the opinion, but the auditor concludes that the
possible effects on the financial statements of
undetected misstatements, if any, could be
material but not pervasive”.

In other words, in case the auditor is not able

to quantify the impact of an adverse event due
to lack of sufficient evidence, they should at
least provide an explanation of the potential
impact without necessarily quantifying it,
which is missing in this qualified opinion.

“Even if they could not quantify the impact,

they should have listed out the possible
impacts on the company for the shareholders.
The auditor’s allegiance lies with
shareholders, and not the company. At best,
this looks like the auditor is trying to cover
himself and at the same time is toeing the
company line,” says another chartered
accountant, on condition of anonymity.

Shah Dhandharia and Co. clearly falls short.

More significantly, similar qualified opinions

were rolled out in the case of Adani Power (by
SRBC & Co.), Adani Green Energy (by SRBC &
Co. and Dharmesh Parikh and Co.), Adani Total
Gas (by Shah Dhandharia & Co.) and Ambuja
Cements (by SRBC & Co.). That these qualified
opinions followed in quick succession soon
after Shah Dhandharia and Co.’s qualified
opinion in the case of Adani Enterprises and
Adani Total Gas seems very convenient.

More so when you consider that the

Hindenburg report contains allegations that
directly relate to the group’s processes and
lack of transparency. For instance, one of the
allegations was that the group, with more than
578 subsidiaries, uses related-party
transactions to move money around, boost
earnings and prop up entities. While the group
does disclose its related-party transactions,
several transactions are not reported. Besides,
several entities with “no discernible business
behind them wound their way through an
actual operating Adani private entity to show
up on the balance sheet of publicly-listed
Adani Enterprises”.

So this vague qualified opinion now seems

conveniently timed.

All three audit firms did not respond to queries

sent by The Morning Context.

The Adani group attributes the similarity of

the qualified opinions to the similarity of the
situation across companies. “As the matter is
sub-judice, the situation is identical across
entities and therefore, it is obvious that
auditors will reach the same conclusion. The
language of the audit report is driven by
Standards on Auditing as issued by ICAI. Since
the matter of the qualification is similar in
nature across entities and reporting of the
same being driven by Standards, the language
used by different auditors is similar. We deny
any such insinuations and aspersions cast in
your queries, pertaining to the opinion of the
auditors or any alleged wrong practice giving
reference to anonymous experts, which we
neither want to ascertain or verify,” a
spokesperson of the group said in an emailed
response.

In October, we had reported on the lack of

experience of the Adani group’s primary
auditors, a point highlighted by Hindenburg
Research in its report as well. “Shah
Dhandharia hardly seems capable of complex
audit work. Adani Enterprises alone has 156
subsidiaries and many more joint ventures
and affiliates, for example. Further, Adani’s 7
key listed entities collectively have 578
subsidiaries and have engaged in a total of
6,025 separate related-party transactions in
fiscal year 2022 alone, per BSE disclosures,”
Hindenburg Research said in its note.

However, the larger concern, as we had

reported, is possible lack of in-principle
adherence to the rotation clause of the
Companies Act, 2013, under which a listed
company is supposed to change its statutory
auditor every five years. Adani Enterprises
changed its auditor from Dharmesh Parikh
and Co. to Shah Dhandharia and Co. in 2018.
Yet, most of the new auditors, including the
signing partners, had formerly worked with
Dharmesh Parikh & Co.

Shah Dhandharia and Co. has five designated

partners: Pravin Dhandharia, Shubham
Rohatgi, Harshil Shah, Karan Amlani and
Pratik Vyas. All of them, save one—Pratik Vyas
—have worked with Dharmesh Parikh and Co.,
either as partners or as article assistants.
Rohatgi, one of the partners, in a 11 May
interview, says that he, along with some
others, were directly made partners of Shah
Dhandharia and Co. after their articleship.
Article assistants being made signing partners
immediately after completion of their training
and passing requisite exams is unprecedented
in any reputed audit firm. It takes years of
managerial and supervisory experience before
such a promotion to a position of
responsibility is handed out.

In the same interview, Rohatgi says that the

whole Adani Enterprises statutory audit team
has no functioning office and is based out of
the latter's premises. While it is common and
acceptable for audit teams to work out of
client premises for the sake of convenience,
data security and access to management, audit
partners never base themselves out of client
premises in order to preserve independence.
The details available with the Ministry of
Corporate Affairs reveal that Shah Dhandharia
and Co. does have a registered office—about 19
kilometres away from the Adani office—at
Mithakhali Six Roads in Ahmedabad. Rohatgi
states that these premises are used by the
indirect taxation team of Shah Dhandharia
and Co.

“This is not legally wrong. Nor does it prove

any wrongdoing. But this does compromise
the firewall between the company and the
auditor. It increases the familiarity between
the auditor and the client, which was the main
reason behind the rotation clause,” says the
second chartered accountant quoted above.

Asked about the propriety of auditors basing

themselves out of their client’s premises, the
Adani group spokesperson gave a somewhat
roundabout answer. “Listed entities are
required to publish their reviewed/audited
standalone as well as consolidated financial
results on quarterly basis. For this purpose, to
discharge their professional duty, auditors
have to devote and spend substantial time
each quarter in performing their audit/review
obligations. Hence, it is standard practice
across industry for auditors to visit client
locations at regular intervals so as to access
and review any documents inter-alia such as
books of accounts, invoices, and financial
records as may be applicable to perform their
obligations. This also ensures ease of access,
confidentiality of information and faster
turnaround time. In accordance with this
standard industry practice, various
professional services providers such as
auditors visit offices on a regular basis to
perform their statutory and legal obligations
as and when needed.”

Tight on disclosure
Adani Enterprises’s disclosure about
compliance with the relevant laws is
intriguing, to say the least. The findings and
conclusions of the review have not explicitly
been disclosed. With just two sentences, the
company has refuted extensive and detailed
allegations that have resonated in the
Supreme Court and Parliament, prompting an
investigation by the Securities and Exchange
Board of India.

Under Regulation 30 of SEBI’s Listing

Obligations and Disclosure Requirements, a
listed entity is under obligation to
compulsorily disclose material information
that the board of directors deem fit.
Allegations made by the American short-seller
are certainly material in nature and did have a
material impact on the group’s shareholders,
as the group lost $135 billion in market value
in less than a month after its report was
released. Presumably, the “independent
assessment by a law firm” and its findings are
considered material information and hence
the disclosure via Note 8.

But Adani Enterprises’s disclosure, in this

context, is also questionable. Why did it and
the other Adani group companies not
undertake a proper forensic audit instead? The
answer likely rests in the SEBI regulations
once again. Sub-clause 17 of the LODR
regulations states that “in case of initiation of
forensic audit, (by whatever name called), the
company should disclose the reason behind
initiating the audit report, along with the
forensic audit”. This would have entailed
detailed disclosures..

What the company appears to have done

instead was receive legal advice on the
allegations and pass it off as an “independent
review” as stated in Note 8.

When asked why the law firm behind the

review wasn’t named, an Adani group
spokesperson said: “As disclosed to the stock
exchanges on 4th May, 2023 (as part of our
financial results), Adani Group carried out an
independent review of transactions through a
law firm to uphold the principles of good
governance. The report has confirmed the
Group's compliance with applicable laws and
regulations. It is a voluntary assessment and
the information contained in the Report is for
the internal reference of our relevant
stakeholders. It is not mandatory to disclose
the details of this Report under the applicable
law.”

This is convenient. In the past, Adani

Enterprises has denied any material impact of
Hindenburg Research’s allegations on the
company's financials. “Management of the
Group has assessed that no material financial
adjustment arises to the consolidated financial
results for the quarter and nine months ended
31st December, 2022 with respect to these
allegations,” the company had said in its
December 2022 quarter results.

The Adani group’s declaration and its

auditors’ qualified opinions might be
acceptable, according to the letter of the law.
However, they seem to be inadequate from the
perspective of the spirit of the law, given that
they involve a group of systemic significance,
with a combined market valuation of over $110
billion.

Ujval Nanavati contributed to this story.

Cover illustration by Rajat Baran / The

Morning Context.

Adani Enterprises Ltd Adani

Conglomerates Shah Dhandharia &Amp; Co

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