BY: V Srinivasan
Startups are now an important part of our economy. They have recently attracted significant investments that are very risky capital. Being the third largest startup ecosystem in the world after the US and China is great. Giving risk capital to our creative and innovative minds in the midst of a young, tech-educated population is the key to reaching 5 trillion GDP and reaching his 3rd place in the GDP league table. It’s a great strategy that works.
According to the DPIIT website, nearly 100,000 start-ups have been registered to date, with over 100 being unicorns with cumulative capital investment exceeding $100 billion.
Angel investing, which is at the forefront of the startup ecosystem and also the riskiest category of investment, is catching up. There are many angel investment platforms and more and more retail investors are eager for exposure to this asset class.
Recent events both in India and abroad have pointed to serious flaws in the ‘governance’ architectures of higher value startups, causing widespread negativity in startups and a troubling surprise. is throwing.
To further clarify, I’m digging deep into the recent GoMechanic.in incident. This raises many open questions for reflection on how role players manage these organizations in the context of risk and growth, integrity and compromise, value creation and idea dilution. just leave it.
⦁ The startup was founded in 2016 by Amit Bhasin and Kushal Karwa in one workshop
⦁ Raised $250,000 seed round in 2016
⦁ Subsequently raised $12-13 million through various rounds
⦁ Raised $42M on December 21st at $285M valuation (90Cr sales ended March 22nd – ~$12M – ~24x revenue)
⦁ SoftBank’s DD appoints EY, pointing out financial accounting fraud on December 22nd
⦁ PWC audited in 1920, KPMG audited in 2021 and 2122, current auditor
audit process
⦁ PWC issued a qualified audit opinion on its accounting process for the 2020 fiscal year. Its main qualification is to maintain basic records and books of services rendered to end customers in workshops (Note 42).
With regard to the maintenance of the books of accounts under Section 128 read in conjunction with Section 2 (13) of the Act, the Company shall be responsible for the receipt and issuance of goods received directly by the Customer (service partner’s workshop) on the instructions of the Customer. does not maintain inventory records of Formal documentation mapping the company and the services provided by the workshop to the end customer and the commission invoice issued by the company at the workshop for B2C customers. As the Company has not yet filed with the relevant authorities for a late admission/compounding for the fiscal year ended March 31, 2020, the impact of such non-compliance and the resulting impact on its financial statements is currently unknown. cannot be verified..
⦁ This memo shows that there are serious deficiencies related to basic bookkeeping
⦁ PWC will resign in 2021 and KPMG will take over as auditor. The aforementioned exception has been explicitly removed and KPMG has issued a clean audit opinion.
⦁ However, in FY21 note 42 was presented differently and due to the change in the ‘revenue recognition’ policy in FY21, the revenue shown in FY20 should have been reduced by Rs.9 Cr but a loss or loss We acknowledge that there is no impact on Reserves – The relevant revenue amount according to audited statements for 2020 is 14 Cr – that is, the number should only be 5 Cr. This is only possible if both the income and expense sides swell by the same amount. This has not been emphasized by PWC in the last few years.
⦁ KPMG issued a certification in 2022 for the non-existence of internal controls over financial reporting, which should not be confused with internal controls in general, but to give readers a warning signal enough.
⦁ EY’s DD report, following three audit reports, appears to point to even more glaring gaps in revenue recognition and inventory management that both PWC and KPMG failed to report.
It should be noted that the company did not have a CFO or an internal auditor. The board failed to recognize the need to invest in the company’s internal controls and governance processes, even though he received qualified opinions from the statutory auditors for three consecutive years.
⦁ It can be inferred that the auditors have sniffed something out but avoided calling attention to investors by not stating the obvious and filed a protective action under the guise of a complexly worded audit opinion.
Recommendation
⦁ Startups are systemically important to India’s growth trajectory, both in attracting FDI, creating jobs, creating an IP-driven economy and creating wealth for the country.
⦁ A lot of reputational damage has happened in the startup ecosystem, with consequences across the spectrum
⦁ Start-ups are inherently fast-scaling, requiring concomitant improvements in governance architecture and anchoring to very different threshold metrics than typical manufacturing and service companies .
⦁ If registered as a start-up with DPIIT, even privately held companies should review the compliance threshold of Rs.10 Cr for appointment of CFO and relate it to valuation and funding.
⦁ In addition, in a step-by-step manner, in line with the capital raised, the government will also inform the appointment of an internal audit firm, the implementation of ICOFR and an independent audit committee headed by experienced accounting professionals who will serve as independent directors. is needed.
⦁ Auditors and audit committees should investigate whether internal controls over transactions and financial reporting are responsive to the scale of business growth.
⦁ The General Affairs Department should notify these immediately without setting up committees.
⦁ The wording of the audit report should be simplified to be understandable by the general public and should be considered by ICAI immediately.
⦁ If an auditor resigns after just two years, it is appropriate to give real reasons rather than vague reasons. Any change of auditor within four years must be investigated and submitted to the Board for consideration and further action.
⦁ Auditor work must be thoroughly peer reviewed and penalties must be exemplary for late auditors. No such example has been found so far since the Satyam incident.
About the Author: Srinivasan V Swamy is the Founding CFO of Bridge. He is also an independent director on multiple corporate boards.
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