From Published Accounts

Ricoh India Ltd (period 1st April 2015 to 30th September 2015) (as submitted to Stock exchanges on 19th May 2016)

Compilers’ Note

The disclosures given by the above company (as reproduced below) have created ripples in the accounting and auditing profession. The press and some corporate commentators have compared the developments as akin to the ‘Satyam’ fraud. The disclosures also leave a lot of questions unanswered about the role of the Board and the independent directors, the company management and the auditors.

From Notes to Unaudited Financial results

1. Subject to the observations below, the financial results have been prepared in accordance with the Generally Accepted Accounting Principles in India, the Accounting Standards specified u/s. 133 of the Companies Act, 2013 read with Rule 7 of the Companies (Accounts) Rule, 2014 and the relevant provisions of the Act.

2. In November 2015 at a meeting with the Audit Committee, prior to the completion of their limited review of financial results relating to quarter and 6 months ended 30 September 2015, B S R & Co. LLP (“BSR”), the statutory auditors made certain observations which indicated that further procedures and investigations were required in respect of many transactions before it could be opined that the draft unaudited financial results are free of material misstatements and that they had been prepared and presented in accordance with applicable accounting standards and in accordance with the requirements of clause 41 of the listing agreement. In view of the above, the Company did not adopt the aforesaid financial results and it, through its Audit Committee appointed M/s S. S. Kothari & Mehta another audit firm to conduct a review of the observations of BSR as per Agreed upon Procedures. The report of M/s S. S. Kothari & Mehta was inconclusive and needed further investigation. Hence, unaudited financial results could not be finalized.

3. The Audit Committee, thereafter, appointed Shardul Amarchand Mangaldas & Co. (“SAM & Co.”) as independent legal counsel, and the said law firm appointed M/s PricewaterhouseCoopers Private Limited (“PwC”) for conducting a forensic review of the Company’s accounts:

(i) To identify whether the financial statements, and thereby the underlying books of account, of the Company have been misstated or misrepresented

(ii) To quantify the extent of misstatement and/ or misrepresentation including the personnel and entities involved

(iii) To identify the modus operandi of the alleged wrong doings and economic rationale for transactions leading to wrong doings, to the extent possible

(iv) To assess whether there was personal profiteering by the Company personnel. The period of PWC review was limited to 1 April 2015 to 30 September 2015.

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6. PwC’s report contains only their preliminary findings and specifically states that further procedures were required covering more comprehensive information and further analysis of electronic documents and data extracted from various devices and certain unprocessed information. The preliminary findings in PwC Report inter alia indicate that unsupported out of books’ adjustments were made to the net sales, expenses, assets and liabilities, in order to report higher profits or to cover previously unreported losses; revenue was recorded based on orders in hand or on invoicing without dispatch/delivery of goods which may not be in conformity with company’s accounting policies on revenue recognition; very substantive back to back purchase/sales transactions with no / minimal value addition; unsupported and backdated transactions recorded in the books of accounts; nexus between the key managerial personnel, vendors and customers of the company; and cases of some customers having bogus addresses and in case of some vendors and customers’ undue favor of payment and other arrangements having been given and sale of non-existing products. Their report was submitted to SAM & Co, and the Audit Committee at a meeting of the Audit Committee held on 20th April 2016.

7. The audit Committee members were briefed on the outcome of the forensic investigation on April 20, 2016 and immediate disclosure of findings of PwC Indicating wrongdoing, were submitted by the Audit Committee to the Bombay Stock Exchange (“BSE”), the Securities and Exchange Board of India (SEBI) and the Ministry of Corporate Affairs or April 20, 2016. The BSE disclosure constitutes a qualifying statement for the financial results. In its letter to SEBI, the Company has requested SEBI to conduct an investigation to ascertain if the incorrect financial statements had any impact on the securities market and the investors, particularly under the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 and the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations, 2003.

8. The disclosure made by the Audit Committee to the BSE on 20th April, 2016, amongst others, state that based on the review of the preliminary findings of PwC for the two quarters i.e. 1st April, 2015 to 30th September, 2015, the Audit Committee and the Board were of opinion that the books of account and other relevant books, papers and financial statement for the quarter ended 30th June, 2015 and 30th September, 2015 do not reflect true and fair view of the state of affairs of the Company.

9. The Company is investigating the extent of deviations from true and fair view and also the reasons for the same, including but not limited to, internal control issues, complacency of certain employees and suspicions of fraud. Investigations are ongoing and the financial results are based on current available information. Revisions in the financial results may be required based on the outcome of the investigations.

10. The PWC report as well as communications of the Company with the regulators were provided to B S R on 3 May 2016. Thereafter, the Company has received Form ADT – 4 regarding reporting of suspected offence involving fraud to the Central Government from B S R on 5 May 2016 as required by Rule 13(12)(a) of the Companies (Audit and Auditors) Rules, 2014. The management is in the process of providing its response thereto.

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14. The management has proceeded on the basis that the opening balances as at 1 April 2015 and those as at 1 July 2015 are correctly stated but this assumption may be proved incorrect in which case the accounts as presented above may undergo consequential changes.

15. The Auditors of the Company have carried out the Limited review of the above unaudited financial results for the half year ended on 30th September, 2015 in terms of the Clause 41 of the Listing Agreement.

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From Independent Auditor’s Review Report

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2. The financial results for the three months ended 30 June 2016 which are included in the results for the six months period ended 30 September 2015 and periods earlier to 30 June 2015, set out in the accompanying Statement were reviewed/audited earlier by the then statutory auditors of the Company whose reports have been furnished to us. Attention is invited to notes forming part of the financial results wherein a large number of irregularities and suspected fraudulent transactions / observations have been summarised. Further, attention is invited to note 14 which states as below:

“The management has proceeded on the basis that the opening balances as at 1 April 2015 and those as at 1 July 2015 are correctly stated but this assumption may be proved incorrect in which case the accounts as presented above may undergo consequential changes.”

Consequently, the opening balances as of 1 April 2015 and 1 July 2015 may need substantive adjustments.

3. We conducted our review in accordance with the Standard Review Engagement (SRE) 2410, “Review of Interim Financial Information performed by the Independent Auditor of the Entity”, issued by the Institute of Chartered Accountants of India. This standard requires that we plan and perform the review to obtain moderate assurance as to whether the financial results are free of material misstatement. A review is limited primarily to inquiries of Company personnel and analytical procedures applied to financial data and thus provides less assurance than an audit. We have not performed an audit and accordingly, we do not express an audit opinion.

4. Attention is invited to Note 1 to 14 of the financial results which list a large number of irregularities and suspected fraudulent transactions / observations arising from our review procedures followed by investigation by independent experts and management assessment. In this regard, we state as below:

– The assumption regarding correctness of opening balances as at 1April 2015 and as at 1 July 2015 may be proved to be incorrect in which case the financial results as presented above may undergo substantive changes (refer to note 14);

– As per the management, the books of account and other relevant books, papers and financial statement for the quarter ended 30 June 2015 and 30 September 2015 do not reflect true and fair view of the state of affairs of the Company. (refer to note 8);

– The findings of our review procedures, those of the independent investigations and of the management (refer note 1 to 14) indicate a large number of irregularities and suspected fraudulent transactions in many areas.

In particular:
• unsupported out of books adjustments made to the net sales, expenses, assets and liabilities, in order to report higher profits or to cover previously unreported losses;
• revenue was recorded based on orders in hand or on invoicing without dispatch/delivery of goods. Revenue recognition in respect of composite contracts was on the basis of invoicing without an evaluation of linkage with performance as per terms of the contract. These may not be in conformity with generally accepted accounting principles in India;
• very substantive back to back purchases and sales transactions / rendering or receipt of services to customers / vendors having no / minimal value addition including with those having close connections / possible conflict of interest;
• inconsistencies in product pricing with market rates;
• unsupported and backdated transactions recorded in the books of accounts;
• nexus between then key managerial personnel, employees, vendors and customers of the company;
• cases of some customers having non-traceable addresses / having unrelated background;
• in case of some vendors and customers’ undue favour of payment and other arrangements having been given and sale of non-existing products; and
• certain entries recorded in the books of account without appropriate justification / proper supporting documents.

5. In relation to our review procedures pertaining to sales and purchases, we have not been provided with satisfactory explanation / information/ documentation such as:

– documentation and validation of information contained in customer evaluation form including basis of selection, acceptance of customers, assigning credit limit to the customers etc.;

– terms and conditions of the vendor/ customer contracts for sale and purchase of goods and services;

– carriers’ receipts for movement of goods, proof of delivery (POD) and customer acknowledgements etc.;

– identification of goods purchased/ sold;

– inventory records showing details of quantity purchased, sold and valuation thereof;

– periodic quantitative reconciliation of goods purchased/sold; non-recording of certain purchase invoices and corresponding credit notes;

– reconciliation of customer’s sub-ledgers with General ledger; and

– reconciliation of sales and purchase with the statutory records.

6. Certain large advances / balances of customers and vendors have not been reconciled. In the absence of appropriate supporting documentation / reconciliation / confirmation by the concerned party, we are unable to state whether adequate provision / adjustment therefor bas been made.

7. In our view, the internal controls both operating and financial including information technology controls require considerable strengthening. In particular, controls over maintenance of books of account, proper supporting documentation need a thorough review.

8. Attention is invited to segment disclosure made in the financial results based on the segments identified during the year ended 31 March 2015. We have not been provided with justification/ detailed analysis for identification and disclosure of such segments. Consequently, we are unable to comment as to whether the segments disclosed are in compliance with the requirements of Accounting Standard-17 ‘Segment reporting’ specified u/s. 133 of the Companies Act, 2013.

9. Attention is invited to note 7 that the Company has requested Securities Exchange Board of India to conduct an investigation to ascertain if the incorrect financial statements had any impact ‘on the securities market and the investors, particularly under the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015, and the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations, 2003. Pending the conduct of such investigation, if any, we are unable to comment on its impact on the financial results for the quarter and half year ended 30 September, 2015.

10. Basis the initial observations noted during the review of the financial results and issues highlighted in the preliminary findings, we have made the necessary reporting on 5 May 2016 to the Audit Committee as required by Rule 13(12)(a) of the Companies (Audit and Auditors) Rules, 20l4 [as amended by the Companies (Audit and Auditors) Amendment Rules, 2015]. Pending response from the Company, we are unable to comment on the magnitude, the period, the modus operandi, the persons involved and the consequential impact on tile financial results for the quarter and six months ended 30 September 2015.

11. Attention is invited to note 9 according to which the Company is investigating the extent of deviations from true and fair view and also the reasons for the same, including but not limited to, internal control issues, complacency of certain employees and suspicions of fraud. Investigations are ongoing and the financial results are based on current available information.

12. In view of the fact that the investigation are ongoing and because of substantive nature of the matters described in paragraphs 4 to 11 above, we are unable to quantify the impact of these possible adjustments to these financial results and conclude whether the going concern assumption is appropriate or not.

Because of the very substantive nature and significance of the matters described in paragraphs 2 to 12 above and because of the limitation on work performed by us, we have not been able to obtain moderate assurance as to whether the accompanying statement of unaudited financial results has been prepared in accordance with the applicable accounting standards and other recognized accounting practices and policies or that the unaudited financial results are free of material misstatement or state whether the unaudited financial results are presented in accordance with the requirements of Clause 41 of the Listing Agreement.