Big 4 auditors need to double down on diligence to net willful fraudsters, says Sequoia Capital’s Rajan Anandan

In the last 12-15 months, India has seen a few cases of willful fraud. When such cases arise, venture capital firms must take action to investigate, said Rajan Anandan, managing director of Sequoia Capital India. This comes at a time when its portfolio startup GoMechanic is under intense scrutiny for falsifying financial numbers.

“What we are seeing in India in the last 12-15 months, are a few situations of willful frauds. When you see willful fraud you have to take action to investigate on that,” Anandan said at the Indian Venture and Alternate Capital Association (IVCA) Conclave 2023.

Four Sequoia portfolio startups, including BharatPe, Zilingo, Trell, and now GoMechanic, have allegedly had financial irregularities in the last year and a half.

"When you have serious governance lapses, who are investigated and concluded to be frauds, those are super serious. Willful fraudsters will have their ways to hide things from Big 4 auditors. It’s very difficult to catch them. You need to double down on diligence,” he said.

Anandan, speaking at the conclave, stated that the ecosystem should focus on startups much earlier in terms of governance practices that need to be put in place. “By the time you reach Series C, you need to have a CFO. You have to start thinking about putting in place an audit committee for both external and internal audit. You need to have an independent board of directors,” he said.

Incomplete audits in startups, he believes, are unacceptable. However, Anandan believes that at the seed stage, startups should not have an independent board of directors because it is too early.

“At the end of the day, founders need to be aware of what needs to be done and even investors need to ensure that these things happen. Venture capital is a business of trust,” he said.

“We trust our founders, we are in a long-term partnership. What has happened is there has been a few instances of willful frauds, we have taken action on that; that has been quite challenging,” he added.

This comes after Moneycontrol reported in January that GoMechanic founder Amit Bhasin admitted to financial reporting errors at the Sequoia-backed car repair startup and stated that the cash-strapped company will lay off roughly 70% of its workforce while also having its accounts audited by a third party.

Fraud founders won’t find funding easily

According to Anandan, it will be difficult for the founders of such startups to secure institutional funding if they are labelled as fraudulent.

“The companies which are clearly in the fraud bucket, will find it very difficult to raise funds from institutional investors. As an institutional investor, how do you invest in a founder who has been found to be guilty in its previous avatar. That’s an extreme situation,” he said

Anandan also said that one needs to separate valuation corrections from founders who did not manage their businesses well, and frauds separately.