KPMG, one of the world's biggest audit firms, has pointed out discrepancies in food delivery firm Swiggy's accounting practices in its audit report, according to documents obtained by Moneycontrol.
It has given what is known as a `qualified opinion’ to Swiggy. An auditor issues a qualified opinion when he is not convinced or has concerns about a specific aspect of the company’s accounting practices, and thinks it goes against the law.
Experts believe it is a result of technical errors and difference in opinion over laws - documents said.
An auditor’s role is to examine a company’s books of accounts and state whether for a given financial year, the books present a true and fair view or not.
For FY19, KPMG (BSR & Associates LLP) gave Swiggy (Bundl Technologies Pvt. Ltd.) a qualified report because Swiggy’s financial statements do not classify the buyback rights that preference shareholders have as a liability- as needed by the new Indian Accounting Standards (Ind-AS) that large Indian companies are now expected to follow.
Swiggy’s investors, including Prosus Ventures (Naspers), Tencent, Coatue Management and others, hold preference shares, which have a buyback right on them. This right is meant to protect investors when the company shuts down. However, these investors still do have a buyback right, which is why they need to be classified by law as a liability from the company’s perspective- which Swiggy did not do.
According to KPMG’s report, “Such preference shares that contain a buyback right with the holders need to be accounted for at fair value. As a result, the classification and measurement of the liability through profit and loss, the gain/loss from such adjustments, related income tax effects for the year 31st March 2019 are misstated.” The need to state it as a liability is as per Ind AS 32 and Ind AS 107.
The buyback right means that after a certain pre-agreed period, if Swiggy is not able to give its investors an exit via an initial public offering (IPO) or a merger or acquisition, then the investors can sell their shares to Swiggy for an exit. However, is it highly unlikely that such a clause gets enforced.
“In accounting, there is a concept called substance over form, which means that financial statements should reflect their economic substance rather than the legal form - which may be legally right but impractical to implement,” a senior auditor told Moneycontrol, requesting anonymity. “This issue over buyback rights as liability violates that principle because it is a liability only on paper. It is highly unlikely that it will be enforced,” the person added.
However, the difference in opinion between KPMG and Swiggy in this case stems from how seriously a firm takes technical matters, and a change in law. Most Indian companies have, traditionally, followed the Indian Generally Accepted Accounting Principles (I-GAAP). However, from 2015-16 onwards, Ind AS was introduced so that Indian accounting is elevated to the globally accepted and recognised International Financial Reporting Standards.
Ind AS has been applicable to private companies with a net worth of over Rs 500 crore from 2016-17. However, many firms, particularly start-ups, have struggled to prioritise this transition as they have grown rapidly during the period and been more focused on fundraising, investor relations and core business rather than accounting- which is slowly changing today.
“As per the older GAAP, this (classifying as liability) would not have been a problem at all, because GAAP treats equity and preference shares the same way. This is a technical issue, but Swiggy resolved it later than it should have, which is why it agreed to a qualified report,” said a person aware of discussions, requesting anonymity.
KPMG’s report also says that Swiggy later waived off the investors’ buyback rights irrevocably- solving the issue altogether for further years.
“Subsequent to the balance sheet date, the majority preference shareholders having the ability to trigger put option have irrevocably waived these rights. Basis this development and legal advice obtained by the Company as on date of the waiver, the buyback clause is neither enforceable nor exercisable. Accordingly, on the date of the waiver obtained, the above-mentioned preference shares will be classified from liability to equity,” the report says.
Giving a qualified opinion for this also depends on the auditor in question. Two senior auditors confirmed to Moneycontrol that some prominent audit firms take an aggressive stance on such issues, while others take a long-term view, assuming they will be fixed next year, and approve the accounts.
In response to Moneycontrol’s queries, a Swiggy spokesperson said in an email, “The audit qualification pertains to the Financial year 2018-19 and previous comparatives, as the Company transitioned from the previous Accounting standards (Indian GAAP) to IndAS. There are a lot of technical differences in both the standards specifically with respect to the accounting treatment of financial instruments. The classification of equity vs liability is a highly complex and often debated technical matter in the start-up industry. In the case of Swiggy, as the preference shareholders possessed certain buyback rights, which they never intended to exercise, the rights were waived off irrevocably by the investors.”
“With this, the presentation and classification issue under IndAS stands resolved as of the financial year ended March 31, 2020. Considering the technical complexity of the matter, as a standard practice the auditor has issued a qualified opinion for the relevant previous financial years,” the spokesperson added.
RamificationsThe issue throws light on how start-ups are still taking time to adjust to regulations, and for many, it is not top priority. India’s unicorns - start-ups, particularly those valued at over a billion dollars- are relatively lax about audit and accounting rules, investors and lawyers say. As many of them gear up to public and become accountable to a larger section of investors and stakeholders, they will have to fix these issues, they add.