Category: From Published Accounts

Illustration of Qualified
Opinion on account of alleged improper transactions with related parties

Fortis Healthcare Ltd (31^st March 2018) From Auditors’ Report on Standalone Ind AS Financial Statements

Basis for Qualified Opinion

1. As explained in Note 30 of the Standalone Ind
AS Financial Statements, pursuant to certain events/transactions, the erstwhile
Audit and Risk Management Committee (the ‘ARMC’) of the Company decided to
carry out an independent investigation by an external legal firm on certain
matters more fully described in the said Note. The terms of reference for the
investigation, the significant findings of the external legal firm (including
identification of certain systemic lapses and override of internal controls),
which are subject to the limitations on the information available to the
external legal firm and their qualifications and disclaimers as described in
their Investigation Report, are summarised in the said Note.

Also, as
explained in the said note:

a) As per the assessment of the Board, based on
the investigation carried out through the external legal firm, and the
information available at this stage, all identified / required
adjustments/disclosures arising from the findings in the Investigation Report,
have been made in these Standalone Ind AS Financial Statements.

b) With respect to the other matters identified in
the Investigation Report, the Board intends to appoint an external agency of
repute to undertake a scrutiny of the internal controls and compliance
framework in order to strengthen processes and build a robust governance
framework. They will also assess the additional requisite steps to be taken in
relation to the significant matters identified in the Investigation Report
including, inter alia, initiating an internal enquiry.

c) At this juncture the Board is unable to make a
determination on whether a fraud has occurred on the Company in respect of the
matters covered in the investigation by the external legal firm, considering
the limitations on the information available to the external legal firm and
their qualifications and disclaimers as described in their Investigation
Report.

d) Various regulatory authorities are currently
undertaking their own investigation (refer Note 31 of the Standalone Ind AS
Financial Statements), and it is likely that they may make a determination on
whether any fraud or any other non-compliance/ illegalities have occurred in
relation to the matters addressed in the Investigation Report.

e) Any further
adjustments/disclosures, if required, would be made in the books of account
pursuant to the above actions to be taken by the Board / regulatory
investigations, as and when the outcome of the above is known.

In view of
the above, we are unable to comment on the regulatory non-compliances, if any,
and the adjustments / disclosures which may become necessary as a result of
further findings of the ongoing or future regulatory / internal investigations
and the consequential impact, if any, on these Standalone Ind AS Financial
Statements.

2. As explained in Note 12 of the Standalone Ind
AS Financial Statements, a Civil Suit has been filed by a third party (to whom
the ICDs granted by Fortis Hospitals Limited, a subsidiary of the Company, were
assigned – refer Note 30 of the Standalone Ind AS Financial Statements)
(‘Assignee’ or ‘Claimant’) against various entities including the Company
(together “the Defendants”), before the District Court, Delhi and have, inter
alia, claimed implied ownership of brands “Fortis”, “SRL” and “La-Femme” in
addition to certain financial claims and for passing a decree that consequent
to a Term Sheet dated 6^th December, 2017 (‘Term Sheet’) with a
certain party, the Company is liable for claims owed by the Claimant to the
certain party. 

The
Company has filed written statement denying all allegations made against it and
prayed for dismissal of the Civil Suit on various legal and factual grounds.
The Company has in its written statement also stated that it has not signed the
alleged binding Term Sheet with the said certain party.

Whilst
this matter was included as part of the investigation carried out by the
external legal firm referred to in paragraph 1 above, the external legal firm
did not report on the merits of the case since the matter was sub judice.

In
addition to the above, the Company has also received four notices from the
Claimant claiming (i)  Rs. 1,800.00 lacs
as per notices dated 31^st May, 2018 and 1^st June, 2018
(ii)  Rs. 21,582.00 lakh as per notice
dated 4^th June, 2018; and (iii) and Rs 1,962.00 lakh as per notice
dated 4^th June, 2018. All these notices have been responded to by
the Company denying any liability whatsoever.

Separately,
the certain party has also alleged rights to invest in the Company. It has also
alleged failure on part of the Company to abide by the aforementioned Term
Sheet and has claimed ownership over the brands as well.

Since the
Civil Suit is sub-judice, the outcome of which is not determinable at this
stage, we are unable to comment on the consequential impact, if any, of the
above matters on these Standalone Ind AS Financial Statements.

3. As explained in Note 6(5) of the Standalone Ind
AS Financial Statements, related party relationships as required under Ind AS
24 – Related Party Disclosures and the Companies Act, 2013 are as identified by
the Management taking into account the findings and limitations in the
Investigation Report (Refer Notes 30 (d) (iv), (ix) and (x) of the Standalone
Ind AS Financial Statements) and the information available with the Management.
In this regard, in the absence of specific declarations from the erstwhile
directors on their compliance with disclosures of related parties, especially
considering the substance of the relationship rather than the legal form, the
related parties have been identified based on the declarations by the erstwhile
directors and the information available through the known shareholding pattern
in the entities. Therefore, there may be additional related parties whose
relationship may not have been disclosed to the Company and, hence, not known
to the Management. 

In the
absence of all required information, we are unable to comment on the
completeness/accuracy of the related party disclosures/details in these
Standalone Ind AS Financial Statements and the compliance with the applicable
regulations and the consequential impact, if any, of the same on these
Standalone Ind AS Financial Statements.

4. As explained in Note 35 of the Standalone Ind
AS Financial Statements, the Company having considered all necessary facts and
taking into account external legal advice, has decided to treat as non-Est the
Letter of Appointment dated 27^th September, 2016, as amended,
(“LoA”) issued to the erstwhile Executive Chairman in relation to his role as
‘Lead: Strategic Initiatives’ in the Strategy
Function. The external legal counsel has also advised that the payments made to
him under this LOA would be considered to be covered under the limits of
section 197 of the Companies Act, 2013. The Company is in the process of taking
suitable legal measures to recover the payments made to him under the LoA as
also to recover all the Company’s assets in his possession. The Company has
sent a letter to the erstwhile Executive Chairman seeking refund of the excess
amounts paid
to him.

In view of
the above, the amounts paid to him under the aforesaid LoA and certain
additional amounts reimbursed in relation to expenses incurred (in excess of
the amounts approved by the Central Government u/s. 197 of the Companies Act,
2013 for remuneration & other reimbursements), aggregating to Rs. 2,002.39
lakh is shown as recoverable in the Standalone Ind AS Financial Statements of
the Company for the year ended 31^st March, 2018. 

However,
considering the uncertainty involved on recoverability of the said amounts a
provision of Rs. 2,002.39 lakh has been made which has been shown as an exceptional item. 

As stated
above, due to the nature of dispute and uncertainty involved, we are unable to
comment on the tenability of the refund claim, the provision made for the
uncertainty in recovery of the amounts, the recovery of the assets in
possession of the erstwhile Director and other non-compliances, if any, with
the applicable regulations and the consequential impact, if any, of the same on
these Standalone Ind AS Financial Statements.

Qualified Opinion

In our
opinion and to the best of our information and according to the explanations
given to us, except for the effects / possible effects of the matters described
in the Basis for Qualified Opinion paragraphs above, the aforesaid Standalone
Ind AS Financial Statements give the information required by the Act in the
manner so required and, give a true and fair view in conformity with the Ind AS
and other accounting principles generally accepted in India, of the state of
affairs of the Company as at 31^st March, 2018, and its loss, total
comprehensive loss, its cash flows and statement of changes in equity for the
year ended on that date.

Emphasis of Matter

We draw
attention to Note 33 of the Standalone Ind AS Financial Statements wherein it
has been explained that the Standalone Ind AS Financial Statements have been
prepared on a going concern basis for the reasons stated in the said Note.

Our
opinion is not modified in respect of this matter.

Report on
Other Legal and Regulatory Requirements

1. As required by section 143(3) of the Act, based
on our audit we report, to the extent applicable that:

a) We have sought and except for the matters
described in the Basis for Qualified Opinion paragraphs above, obtained all the
information and explanations which to the best of our knowledge and belief were
necessary for the purposes of our audit of the aforesaid Standalone Ind AS
Financial Statements.

b) Except for the effects / possible effects of
the matters described in the Basis for Qualified Opinion paragraphs above, in
our opinion proper books of account as required by law relating to preparation
of the aforesaid Standalone Ind AS Financial Statements have been kept so far
as it appears from our examination of those books.

c) The Standalone Balance Sheet, the Standalone
……….

d) Except for the effects/ possible effects of the
matters described in the Basis for Qualified Opinion paragraphs above, in our
opinion the aforesaid Standalone Ind AS Financial Statements comply with the
Indian Accounting Standards prescribed u/s. 133 of the Act

e) The matters described in the Basis for
Qualified Opinion paragraphs and the Emphasis of Matter paragraph above, in our
opinion, may have an adverse effect on the functioning of the Company.

f)   On the basis of the written representations
………..

g) The qualification relating to maintenance of
accounts and other matters connected therewith are as stated in the Basis for
Qualified Opinion paragraph above.

h) With respect to the adequacy of the Internal
Financial Controls over Financial Reporting of the Company and the operating
effectiveness of such controls, refer to our separate Report in “Annexure A”.
Our report expresses an adverse opinion on the Internal Financial Controls over
Financial Reporting of the Company, for the reasons stated therein.

i)   With respect to the other matters to be
included in the Auditor’s Report in accordance with Rule 11 of the Companies
(Audit and Auditor’s) Rules, 2014, as amended, in our opinion and to the best
of our information and according to the explanations given to us:

a. Except for the possible effects of the matters
described in paragraph 2 of the Basis for Qualified Opinion above, the
Standalone Ind AS Financial Statements disclose the impact of pending
litigations on the financial position of the Company. Refer Note 11 and 12 of
the Standalone Financial Statements

 b.  Except
for the possible effects of the matters described in paragraph 4 of the Basis
for Qualified Opinion above, the Company did not have any long-term contracts
including derivative contracts for which there were any material foreseeable
losses. Refer Note 9(e) of the Standalone Ind AS Financial Statements

c. There were no amounts which were …………….

2. As required by the Companies (Auditor’s Report)
Order, 2016 (“the Order”) issued by the Central Government in terms of section
143(11) of the Act, we give in “Annexure B” a statement on the matters
specified in paragraphs 3 and 4 of the Order which is subject to the possible
effect of the matters described in the Basis for Qualified Opinion paragraphs
of our Audit Report and the material weakness described in Basis of Adverse
Opinion in our separate Report on the Internal Financial Controls over
Financial Reporting.

From Report on Internal Financial Controls over Financial Reporting

Basis for Adverse opinion

The
matters described in the Basis for Qualified Opinion paragraphs of our Audit
Report on the Standalone Ind AS Financial Statements for the year ended 31^st
March, 2018, and the control weaknesses observed in the Company’s
financial closing and reporting process in regard to assessment of the
impairment of goodwill and investments, where the Company did not have adequate
internal controls for identifying impairment indicators, selection and
application of various inputs to be used in testing, review and maintaining
documentation for workings used in testing and concluding whether there is any
impairment, have resulted in material weaknesses in the internal financial
controls over financial reporting as the Company have not (a) adhered to their
internal control policies (b) safeguarded their assets (c) prevented and
detected possible frauds and errors (d) ensured the accuracy and completeness of the accounting records, and (e) prepared
reliable financial information on a timely basis.

A
‘material weakness’ is a deficiency, or a combination of deficiencies, in
internal financial control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the company’s annual or
interim financial statements will not be prevented or detected on a timely
basis.

Adverse Opinion

In our
opinion, to the best of our information and according to the explanations given
to us, because of the effect/possible effect of the material weaknesses
described in the Basis for Adverse Opinion paragraph above on the achievement
of the objectives of the control criteria, the Company, has not maintained
adequate internal financial controls over financial reporting and the internal
controls were also not operating effectively as of 31^st March, 2018
based on the internal financial control over financial reporting criteria
established by the Company considering the essential components of internal
control stated in the Guidance Note on Audit of Internal Financial Controls
Over Financial Reporting issued by the Institute of Chartered Accountants of
India.

We have
considered the material weaknesses identified and reported above in determining
the nature, timing, and extent of audit tests applied in our audit of the
Standalone Ind AS Financial Statements of the Company for the year ended 31^st
March, 2018 and these material weaknesses have, inter alia,
affected our opinion on the said Standalone Ind AS Financial Statements and we
have issued a qualified opinion on the said Standalone Ind AS Financial
Statements.

From Notes
to Standalone Financial Statements

30)    Investigation
initiated by the erstwhile Audit and Risk Management Committee

(a)   There were reports in
the media and enquiries from, inter alia, the stock exchanges received
by the Company about certain inter-corporate loans (“ICDs”) given by a wholly
owned subsidiary of the Company. The erstwhile Audit and Risk Management
Committee of the Company in its meeting on 13^th February, 2018
decided to carry out an independent investigation through an external legal
firm.

(b)  The terms of reference of the
investigation, inter alia, comprised: (i) ICDs amounting to a total
of Rs. 49,414.00 lakh (principal), placed by the Company’s wholly-owned
subsidiary, Fortis Hospitals Ltd (FHsL), with three borrowing companies as on 1^st
July, 2017; (ii) the assignment of these ICDs to a third party and the
subsequent cancellation thereof as well as evaluation of legal notice (now a
civil suit) received from such third party (refer Notes 12 above); (iii) review
of intra-group transactions for the period commencing FY 2014-15 and ending on
31^st December, 2017 (refer Note 27 above); (iv) investments made in
certain overseas funds by the overseas subsidiaries of the Company (i.e. Fortis
Asia Healthcare Pte. Ltd, Singapore and Fortis Global Healthcare (Mauritius)
Limited); (v) certain other transactions involving acquisition of Fortis
Healthstaff Limited (“Fortis Healthstaff”) from a promoter group company, and
subsequent repayment of loan by said subsidiary to the promoter group company.

(c) The investigation report (“Investigation
Report”) was submitted to the re-constituted Board on 8^th June,
2018.

(d)  The re-constituted Board discussed and
considered the Investigation Report and noted certain significant findings of
the external legal firm, which are subject to the limitations on the
information available to the external legal firm and their qualifications and
disclaimers as described in their investigation report, as follows:

(i) The Investigation Report, on the basis of
documents / emails reviewed and interviews conducted, revealed that the ICDs
were not given under the normal treasury operations of the Company/ FHsL
including under the treasury policy and the mandate of the Treasury Committee;
and were not specifically authorised by the Board of FHsL. All ICDs from
December 2011 were repaid until 31^st March, 2016. However, from the
first quarter of the financial year 2016-17, it has been observed that a
roll-over mechanism was devised whereby, the ICDs were repaid by cheque by the
borrower companies at the end of each quarter and fresh ICDs were released at
the start of succeeding quarter under separately executed ICD agreements.
Further, in respect of the roll-overs of ICDs placed on 1^st July,
2017 with the borrower companies, FHsL utilised the funds received from the
Company for the purposes of effecting roll-over.

(ii) In respect of ICDs granted, the Investigation
Report revealed that there were certain systemic lapses and override of
controls including shortcomings in executing documents and creating a security
charge. To clarify, the charge was later created in February, 2018 for the ICDs
granted on 1^st July, 2017, while the Company/ FHsL was under
financial stress.

(iii) While the Investigation Report did not
conclude on utilisation of funds by the borrower companies, there are findings
in the report to suggest that the ICDs were utilised by the borrower companies
for granting/ repayment of loans to certain additional entities including those
whose current and/ or past promoters/ directors are known to/ connected with
the promoters of the Company.

(iv) In terms of the relationship with the
borrower companies, there was no direct relationship between the borrower
companies and the Company and / or its subsidiaries during the period December
2011 till 14^th December, 2017 (these borrower companies became
related parties from 15^th December, 2017). The Investigation Report
has made observations where promoters were evaluating certain transactions
concerning certain assets owned by them for the settlement of ICDs thereby
indirectly implying some sort of affiliation with the borrower companies. The
Investigation Report has observed that the borrower companies could possibly
qualify as related parties of the Company and/ or FHsL, given the substance of
the relationship. In this regard, reference was made to Indian accounting
Standards dealing with related party disclosures, which states that for
considering each possible related party relationship, attention is to be
directed to the substance of the relationship and not merely the legal form.

(v) Objections on record indicate that management
personnel and other persons involved were forced into undertaking the ICD
transactions under the repeated assurance of due repayment and it could not be
said that the management was in collusion with the promoters to give ICDs to
the borrower companies. Relevant documents/information and interviews also
indicate that the management’s objections were overruled. However, the former
Executive Chairman of the Company, in his written responses, has denied any
wrongdoing, including override of controls in connection with grant of the
ICDs.

(vi) There were certain systemic lapses in respect
to the assignment of the ICDs from FHsL to a third party in September 2017 (and
subsequent termination of the arrangement in January 2018), viz., no diligence
was undertaken in relation to the assignment, it was not approved by the
Treasury Committee and was antedated. The Board of FHsL took note of the same
only in February 2018.

(vii) Separately, it was also noted in the
Investigation Report that the aforesaid third party to whom the ICDs were
assigned has also initiated legal action against the Company. Whilst the matter
was included as part of the terms of reference of the investigation, the merits
of the case cannot be reported since the matter was sub-judice.

(viii)
During the year, the Company through its subsidiary (i.e. Escorts Heart
Institute and Research Centre Limited (“EHIRCL”)), acquired 71% equity interest
in Fortis Healthstaff Limited at an aggregate consideration of `3.46 lacs. Subsequently,
EHIRCL advanced a loan to Fortis Healthstaff Limited, which was used to repay
the outstanding unsecured loan amount of Rs 794.50 lakh to a promoter group
company. Certain documents suggest that the loan repayment by Fortis
Healthstaff Limited and some other payments to the promoter group company may
have been ultimately routed through various intermediary companies and used for
repayment of the ICDs /vendor advance to FHsL / Company.

(ix) The investigation did not cover all
related party transactions during the period under investigation and focused on
identifying undisclosed parties having direct/indirect relationship with the
promoter group, if any. In this regard, it was observed in internal
correspondence within the Company that transactions with certain other entities
have been referred to as related party transactions. However, no further
conclusions have been made in this regard.

(x) Additionally, it was observed in the
Investigation Report that there were significant fluctuations in the NAV of the
investments in overseas funds by the overseas subsidiaries during a short span
of time. Further, similar to the paragraph above, in the internal
correspondence within the Company, investments in the overseas funds have been
referred to as related party transactions. The investment was realsed in April
2018 with no loss in the principal value of investments.

(e) Other Matters:

In the
backdrop of the investigation, the Management has reviewed some of the past
information/ documents in connection with transactions undertaken by the
Company and certain subsidiaries. It has been noted that the Company through
its subsidiary (i.e. Fortis Hospitals Limited (“FHsL”)) acquired equity
interest in Fortis Emergency Services Limited from a promoter group company. On
the day of the share purchase transaction, FHsL advanced a loan to Fortis
Emergency Services Limited, which was used to repay an outstanding unsecured
loan amount to the said promoter group company. It may be possible that the
loan repayment by Fortis Emergency Services Limited to the said promoter group
company was ultimately routed through various intermediary companies and was
used for repayment of the ICDs /vendor advance to FHsL.

(f) Related party relationships as required under
Ind AS 24 – Related Party Disclosures and the Companies Act, 2013 are as
identified by the Management taking into account the findings and limitations
in the Investigation Report (Refer Notes 30 (d) (iv), (ix) and (x) above) and
the information available with the Management. In this regard, in the absence
of specific declarations from the erstwhile directors on their compliance with
disclosures of related parties, especially considering the substance of the
relationship rather than the legal form, the related parties have been
identified based on the declarations by the erstwhile directors and the
information available through the known shareholding pattern in the entities.
Therefore, there may be additional related parties whose relationship may not
have been disclosed to the Group and, hence, not known to the Management.

(g)  As per the assessment of the Board, based
on the investigation carried out through the external legal firm, and the
information available at this stage, all identified/required
adjustments/disclosures arising from the findings in the Investigation Report,
have been made in these Consolidated Ind AS Financial Statements.

(h)  With respect to the
other matters identified in the Investigation Report, the Board will appoint an
external agency of repute to undertake a scrutiny of the internal controls and
compliance framework in order to strengthen processes and build a robust
governance framework. Towards this end, they will also evaluate internal
organisational structure and reporting lines, the delegation of powers of the
Board or any committee thereof, the roles of authorised representatives and
terms of reference of executive committees and their functional role. We will
also assess the additional requisite steps to be taken in relation to the
significant matters identified in the Investigation Report, including inter
alia, initiating an internal enquiry.

(i)  The regulatory authorities are currently
undertaking their own investigation (refer Note 31 below), and it is likely
that they may make a determination on whether any fraud or any other
non-compliance/ illegalities have occurred in relation to the matters addressed
in the Investigation Report on the basis of facts, including those facts that
the independent investigator would not have had access to, given their limited
role and limitations stated in the Investigation Report. Accordingly, in light
of the foregoing, the Board of Directors at this juncture is unable to make a
determination on whether a fraud has occurred. That said, the Board of Directors
is committed to fully co-operating with the relevant regulatory authorities to
enable them to make a final determination on these matters and to undertake the
remedial action, as required under, and to ensure compliance with, applicable
law and regulations.

Except for
the findings of the Investigation Report, including matters on internal control
described above, and inability of the Board of Directors to, at this juncture
(as stated above), make a determination on whether a fraud has occurred on the
Company considering the limitations on the information available to the
external legal firm and their qualifications and disclaimers as described in
their Investigation Report, proper and sufficient care has been taken for the
maintenance of adequate accounting records in accordance with the provisions of
the Act for safeguarding the assets of the Company and for preventing and
detecting fraud and other irregularities.

In the
event other exposures were to come to light, the Company / FHsL are committed
to appropriately addressing the same, including making additional provisions
where required.

(j) Any further adjustments/disclosures, if
required, would be made in the books of account pursuant to the above actions
to be taken by the Board / regulatory investigations, as and when the outcome
of the above is known.

31) Investigation by Various Regulatory Authorities

(a)   The Company received a communication
dated 16^th February, 2018 from the Securities and Exchange Board of
India (SEBI), confirming that an investigation has been instituted by SEBI in
the matter of the Company. In the aforesaid letter, SEBI has summoned the
Company u/s. 11C (3) of the SEBI Act, 1992 to furnish by 26^th February
26, 2018 certain information and documents relating to the short-term
investments of  Rs. 473 crore reported in
the media. Failure to produce the information required for investigation could
result in penalties as provided u/s. 15A and criminal proceedings under section
11C(6) of the SEBI Act, 1992. SEBI has also appointed forensic auditors to
conduct a forensic audit, who are also in the process of collating information
from the Company and certain of its subsidiaries. The Company / its
subsidiaries are in the process of furnishing all the requisite information and
documents requested by SEBI and its forensic auditors.

(b)   The Registrar of Companies (ROC) u/s.
206(1) of the Companies Act, 2013, inter alia, had also sought information
in relation to the Company. All requisite information in this regard has been
duly shared by the Company with the ROC.

(c) The
Company has also received a letter from the Serious Fraud Investigation Office
(SFIO), Ministry of Corporate Affairs, u/s. 217(1)(a) of the Companies Act,
2013, inter alia, initiating an investigation and seeking information in
relation to the Company, its material subsidiaries, joint ventures and
associates. The Company in the process of submitting all requisite information
in this regard with SFIO and has in this regard requested SFIO for additional
time to submit the information.

(d)  The Investigation Report of the external
legal firm has been submitted by the Company to the Securities and Exchange
Board of India, the Serious Frauds Investigation Office (“SFIO”) on 12^th June,
2018.

The Company is fully co-operating with
the regulators in relation to the ongoing investigations to enable them to make
their determination on these matters. Any further adjustments/disclosures, if required,
would be made in the books of accounts as and when the outcome of the above
investigations is known.

 

 

ILLUSTRATION OF REPORTING UNDER SEBI LODR
WITH DISCLAIMER OPINION AND REPORTING UNDER SECTION 143(12) TO THE CENTRAL
GOVERNMENT

 

8K
MILES SOFTWARE SERVICES LTD. (31^st March, 2019)

 

From
Independent Auditors’ Report on Consolidated Financial Results

 

DISCLAIMER OF OPINION

 

1.       We were engaged to audit
the accompanying Statement of Consolidated Financial Results of 8K Miles
Software Services Limited (‘the Parent’ / ‘the Holding Company’ / ‘the
Company’) and its subsidiaries (refer paragraph 16 below, for the subsidiaries
that are considered in these consolidated financial results), (the Parent and
its subsidiaries together referred to as ‘the Group’) for the year ended 31^st
March, 2019 (‘the statement’), being submitted by the Parent pursuant to
the requirement of Regulation 33 of the SEBI (Listing Obligations and
Disclosure Requirements) Regulations, 2015, as modified by Circular No.
CIR/CFD/FAC/62/2016 dated 5^th July, 2016.

 

2.       This Statement, which is the
responsibility of the Parent’s management and approved by the Board of
Directors, has been compiled from the related consolidated financial statements
which has been prepared in accordance with the Indian Accounting Standards prescribed
u/s 133 of the Companies Act, 2013 (the Act), read with relevant rules issued
thereunder (Ind AS) and other accounting principles generally accepted in India.

 

3.       Our responsibility is to conduct an audit
of the Statement in accordance with Standards on Auditing specified u/s 143(10)
of the Act and to issue an auditor’s report. However, because of the matters
described in Paragraphs 4 to 15 below, we were not able to obtain sufficient
appropriate audit evidence to provide a basis for an audit opinion on the
Statement.

BASIS FOR DISCLAIMER OF OPINION

 

4.       Report u/s 143 (12) of the Act

During the
course of our audit of the Statement for the year ended 31^st March,
2019 we came across certain transactions that gave us reason to believe that
suspected offences involving fraud have been committed in the Group. Such
transactions with regard to the Statement, inter alia, pertained to:

(a)      Several instances of inconsistencies
between the initial bank statements and the subsequent bank statements provided
for verification in certain subsidiaries. Also see paragraphs 6.3 and 7 below.

 

(b)     Several instances of inconsistencies between
declarations provided by Directors and information available in the public
forum which demonstrated existence of probable related parties which were not
disclosed previously, including certain transactions with such parties which
were not disclosed or approved by the Audit Committee / Board of Directors.
Also see paragraphs 6.3 and 12.1(a) below.

 

(c)      Several instances of transactions with
certain customers, wherein the Company was not able to provide us with the
particulars of the services rendered and acknowledged by the customer, the
details of employees actually rendering such service, the appropriateness and
source of the monies received from such customers. Also see paragraph 7 below.

 

(d)     Several inconsistencies with the names of
the parties / customers mentioned in the bank statements of some of the
subsidiaries and the books of accounts maintained by those subsidiaries. Also
see paragraph 4(a) above and paragraphs 6.3 and 7 below.

 

(e)      Several instances of multiple addresses
being considered in various communications with certain customers in the
invoices, website of the customer, on cheques received from customers, including
instances wherein some of the communication addresses coincided with the
residential address of certain employees of the Company or its subsidiaries,
which impacted our ability to establish the authenticity of the customer. Also
see paragraph 7 below.

 

(f)      Several instances of communications with a
vendor, wherein there were multiple
communications using different email ids, documents with varying
signatures and differences in the spelling of the common signatory of the
vendor, etc., which impacted our ability to establish the authenticity of the
vendor. Also see paragraph 8.1 below.

 

(g)     Several instances of transactions with
vendors, wherein there were inconsistencies between the nature of services as
mentioned in the invoices and the basis of recording in the books of accounts
as consultancy expenses and intangible assets, multiple federal tax
identification against the same vendor, contracts signed by employees post
cessation of their employment, etc. Also see paragraph 8.2 below.

 

(h)      Appropriate approvals and concerns over
recovery of advances made to a related party, by the Group. Also see paragraph
6 below.

 

Pursuant, inter
alia, to the above observations, we requested the Audit Committee of the
Company to provide us with their replies or observations to the aforesaid
matters for us to consider the same as part of our audit.

 

Subsequent
to our reporting of such matters to the Audit Committee vide our letter dated
15^th July, 2019, the Audit Committee in its meeting held on 18^th
July, 2019 appointed an external firm of Chartered Accountants to carry out an
investigation. We are informed that as on the date of this report, the
investigation report of the external firm of Chartered Accountants has not yet
been received by the Company and, hence, the same has not been made available
to us.

 

Further,
we also included the aforesaid matters in our report dated 13^th
September, 2019 to the Central Government in accordance with the requirements
of section 143(12) of the Act.

 

Pending
receipt of the report on the findings of such investigation and pending receipt
of information and explanations and evidence relating to the aforesaid matters
from the management of the Company, we have been unable to obtain sufficient
and appropriate audit evidence in respect of the above matters / transactions
that gave us reasons to believe that suspected offences involving fraud may
have been committed in the company and / or its subsidiaries.

 

In view of
the above, we are unable to comment on the consequential adjustments, if any,
that may be required to the Statement in this regard.

 

5.   Access to books of accounts of a
subsidiary and information on subsidiaries

5.1.    Our terms of engagement for the audit of the
Statement included the management’s responsibility to provide us access, at all
times, to the records of all the subsidiaries of the Company insofar as it
relates to the consolidation of its financial statements as envisaged in the
Act.

 

However,
the Company did not provide us the access to the records and books of accounts
of 8K Miles Software Services FZE, a wholly-owned subsidiary of the Company,
which represents total assets of Rs. 11,635.68 lakhs as at 31^st
March, 2019, total revenues of Rs. 7,560.23 lakhs, profit after tax of Rs.
789.65 lakhs and net cash outflows amounting to Rs. 96 lakhs for the year ended
on that date, as considered in the Statement.

 

These
balances have been included in the Statement by the management based on
financial statements of the subsidiary, prepared in accordance with the
International Financial Reporting Standards (IFRS), wherein the auditor of the
subsidiary has issued an unmodified report.

 

We were
unable to obtain sufficient appropriate audit evidence about the state of
affairs of the subsidiary as at 31^st March, 2019 and the results of
its operations for the year then ended, in the absence of access to the records
and books of accounts of the subsidiary.

 

5.2.    Based on information in the public domain, 8K
Miles Cloud Solutions Pte. Limited, Singapore has stated itself to be a
subsidiary of the Holding Company. This entity appears to have been
incorporated on 8^th May, 2017. Further, 8K Miles Software Services
Pte. Ltd, Singapore and 8K Miles Software Services UK Limited, United Kingdom
exist with the promoter directors appearing as shareholders / directors. The
incorporation of wholly-owned subsidiaries in these countries was approved by
the Board of Directors of the Holding Company on 30^th May, 2018.

 

However,
all these three entities have not been considered by the management of the
Holding Company as subsidiaries in the preparation of the consolidated
financial statements. We are informed by the management that these entities are
not subsidiaries of the Holding Company and the information in the public
domain, including with the regulatory authorities in those geographies, is not
correct.

 

We have
not been provided with the audited financial statements of these entities and /
or any other verifiable evidence to ascertain the relationship of these
entities with the Holding Company. Hence, we are unable to comment on the
relationship of these entities and the impact the financial statements of these
entities may have on the Statement.

 

6.    8K Miles Media Private Limited (8K Miles
Media)

6.1.    Around the last week of September, 2018 we
were made aware of the resignation of the statutory auditor of 8K Miles Media,
a company promoted by the promoter directors of the Company, vide their
resignation letter dated 30^th April, 2018. As per the said letter,
the resignation was due to the misuse of that Audit Firm’s letterhead and
signature of their partner through forgery in certain ODI certificates
submitted by 8K Miles Media to its bankers for transfer of funds of USD 71.51
lakhs (Rs. 4,612.91 lakhs) to 8K Miles Media Holdings Inc. USA, a subsidiary of
8K Miles Media. 8K Miles Media and its subsidiaries (together ‘8K Miles Media
Group’) were identified as a related party in the consolidated financial
statements of the Company for the year ended 31^st March, 2018.

 

During the period ended 31^st December, 2018 the management of
8K Miles Media initiated an independent forensic review to evaluate the
authenticity of the signatures in the ODI certificates referred above. 8K Miles
Media has submitted a copy of the forensic report to the Company. We understand
that the aforesaid forensic report states that the writer of the signature in
the ODI certificates is the same as that of the specimen signatures of the
audit partner as provided to the forensic auditor, thereby concluding that there
was no forgery in the ODI certificates.

 

Since this
matter relates to a company where another firm is the statutory auditor and
since the financial statements of that company are not included in the
consolidated financial statements of the Company, we have not been able to
perform any procedures related to the allegation or the forensic report.

 

6.2.    Further, during the last week of September,
2018,

(a)      the CEO and Managing Director of the
Company, who was also a promoter director in 8K Miles Media, resigned as a
director in 8K Miles Media.

 

(b)     the CFO and Executive Director of the
Company, who was the other promoter director in 8K Miles Media, resigned from
his role as CFO of the Company stating that his resignation was to have the
necessary time to clear all the baseless allegations and unsubstantiated
allegations relating to 8K Miles Media. However, he continues to be a director
in both the Company as well as 8K Miles Media.

 

6.3.    The Company has trade and other receivables
aggregating Rs. 3,309.10 lakhs as at 31^st March, 2019 receivable
from 8K Miles Software Services Inc., a subsidiary. It may be noted that this
subsidiary had loans receivable from entities of 8K Miles Media Group in the
USA aggregating USD 89.61 lakhs (Rs. 5,808.44 lakhs) as at 31^st
March, 2018.

 

We are informed by the management of the Holding Company that such
amounts due, including interest as accrued, have been fully recovered as at 31^st
March, 2019 by that subsidiary. However, in the absence of appropriate workings
for the interest, documentation regarding loan agreements and due to
inconsistencies noted between the transactions as per the bank statements of
the subsidiary with the transactions as recorded in the books of accounts of
the subsidiary, as mentioned in paragraphs 4(a) and 4(d) above, we were unable
to confirm the management’s assertion on the said collections made by the
subsidiary.

 

6.4.    We are unable to conclude if the above
events in 8K Miles Media have any effect on:

(a)      the Group and its operations, in view of
the allegations in the aforesaid resignation letter of the statutory auditor of
that company and the nature of the Group’s relationship with 8K Miles Media, as
described in paragraphs 6.1 and 6.2 above, respectively;

(b)     the status of the Group’s receivables from
such related party, as described in paragraph 6.3 above; and

(c)      the consequential impact, if any, of the
same on the operations of the Group.

 

 7.      Revenue
from contracts with customers and related outstanding receivables

During the
year ended 31^st March, 2019 the Group initially recognised revenue
aggregating to Rs. 54,789 lakhs (including Rs. 2,428.69 lakhs relating to the
Company) from the customers referred to in paragraphs 4(c), 4(d) and 4(e)
above.

The management has, subsequently, based on our report u/s 143(12) of the
Act, reversed and derecognised revenue aggregating to Rs. 16,940.66 lakhs
(including Rs. Nil relating to the Company) and the consequent receivables.
Accordingly, the net revenues recognised from these customers during the year
aggregated to Rs. 37,848.34 lakhs and the outstanding receivables as at 31^st
March, 2019 is Rs. 9,382.13 lakhs (includes balances of Rs. 1,022.36
lakhs outstanding even as at 31^st March, 2018).

 

In the
absence of complete information regarding the proof of services rendered,
efforts expended, basis of revenue recognition and reversal / derecognition,
and in view of our observations in paragraphs 4(c), 4(d) and 4(e) above in
respect of these customers, and inconsistencies in the bank statements referred
in paragraph 4(a) above, we are unable to conclude on the appropriateness /
correctness / completeness / validity of the net revenue recognised, compliance
with the recognition and measurement of revenue required under the Indian
Accounting Standard (Ind AS) 115 – Revenue from Contracts with Customers and
the corresponding receivables in the Statement.

 

The Group
has also not carried out an evaluation of the expected credit loss required
under Indian Accounting Standard (Ind AS) 109 – Financial Instruments
for the outstanding trade receivables as at 31^st March, 2019 and
therefore we are unable to comment on the adequacy and appropriateness of the
provision made against the trade receivable balances as at 31^st
March, 2019.

 

8.       Procurement of services and trade
payables

8.1.    Based on the master service
agreement with the external service provider, referred to in paragraph 4(f)
above, for technical and referral services to be rendered towards certain
customers, referred to in paragraphs 4(c) and 4(e) above, the Company has recorded
consultancy charges of Rs. 1,706.40 lakhs for the year ended 31^st March,
2019 with an outstanding liability of Rs. 1,709.16 lakhs.

 

In the
absence of complete information regarding proof of the services being rendered
by the vendor, and in view of our observations in paragraph 4(f) above in
respect of this vendor, we are unable to conclude on the appropriateness /
correctness / completeness / validity of the expense and the corresponding
liability recorded in the Statement.

 

Further,
the Company has not evaluated the applicability or coverage of such services
under the Goods and Services Tax Regulations and has not accrued / paid the
same. However, in our opinion such tax is payable on those services. The
management has not determined the amount of Goods and Services Tax payable and
any interest thereon. We are unable to conclude on the consequential impact of
the same on the Statement.

 

8.2.    Based on the invoices received from certain vendors, referred to in
paragraph 4(g) above, the Group has for the year ended 31^st March,
2019 recorded consultancy charges aggregating Rs. 26,689.45 lakhs, intangible
assets / assets under development of Rs. 22,267.29 lakhs, with an outstanding
liability of Rs. 2,224.43 lakhs as at that date.

 

In the
absence of complete information regarding nature of the services being
rendered, the customers for whom these services were rendered and the nature of
intangible assets being developed, and in view of our observations in paragraph
4(g) above in respect of these vendors, we are unable to conclude on the
appropriateness / correctness / completeness / validity of the expense, the
intangible asset / asset under development and the corresponding liability /
payment recorded in the Statement.

 

9.       Income Taxes

The Group
has recorded tax expenses (net) of Rs. 1,270.57 lakhs during the year ended 31^st
March, 2019 and has a net tax asset as at that date of Rs. 3,155.17 lakhs and a
net deferred tax liability of Rs. 731.91 lakhs relating to certain of its
foreign subsidiaries.

 

We have not
been provided with the tax returns filed with regard to its foreign
subsidiaries, reconciliation of the balances considered in the tax returns so
filed with the audited financial statements of the subsidiaries, the tax
position and status of assessments of such subsidiaries, a roll forward to the
deferred tax position as at 31^st March, 2019 from 31^st
March, 2018 and the workings for the tax provision for the current year.

 

We are
accordingly unable to conclude on the carrying amounts of tax assets and liabilities,
including deferred tax balances, as at 31^st March, 2019 as
considered in the Statement. Further, in the absence of the tax returns we have
also not been able to validate if the profits of these subsidiaries considered
in the tax returns and as per the books of accounts provided to us were the
same.

 

10.     Intangible asset capitalisation and
evaluation of impairment, including for goodwill

10.1. The Group has during the year capitalised costs
towards internally generated intangible assets and internally generated
intangible assets under development amounting to Rs. 32,393.80 lakhs (also
refer paragraphs 4(g) and 8.2 above).

 

In the
absence of appropriate documentation as to the nature of these intangible
assets, data to demonstrate the appropriateness of the timing to commence
capitalisation of costs associated with such intangible assets as well as the
basis to demonstrate the costs capitalised in fact were associated with the
intangibles being developed, we are unable to comment on the carrying value of
such intangible assets as at 31^st March, 2019.

 

10.2.  The Group has goodwill and acquired
intangibles (net of amortisation) of Rs. 62,800.11 lakhs as at 31^st March, 2019.

 

The
management has not provided us with their assessment of any impairment to the
carrying value of such goodwill and other intangible assets. Accordingly, we
are unable to comment on the appropriateness of the carrying value and the
recoverability of such goodwill and other intangible assets as at 31^st March,
2019.

 

11.     Business Combinations

The Group
had in the previous year ended 31^st March, 2018 completed certain
acquisitions or had paid advances towards proposed acquisitions, wherein we
noted that:

11.1. During the previous year ended 31^st
March, 2018, the Group had recorded an amount of USD 3,304,557 (INR 2,142.01
lakhs) as contingent consideration due to the erstwhile owners of Cornerstone
Advisors Group LLC (‘Cornerstone’) payable upon satisfaction of conditions as
specified in the acquisition agreement. During the current year an amount of
USD 1,747,198 (INR 1,218.85 lakhs) has been paid by the Group to the erstwhile
members of Cornerstone. In the absence of details with respect to satisfaction
of conditions as specified in the acquisition agreement, we are unable to comment
on the amount of contingent consideration that has been paid during the year
and the carrying amount of USD 1,557,359 (Rs. 1,079.56 lakhs) as the liability
towards contingent consideration as at 31^st March, 2019. Further,
such consideration has not been fair valued as required under Ind AS 109.

 

11.2. An advance of USD 6,500,000 was paid by one of
the subsidiaries of the Company, during the previous year ended 31^st
March, 2018, consequent to a share purchase agreement entered into with a
Seller and a Corporation for acquiring the entire outstanding shares of the
Corporation. In accordance with the said agreement, in the event the closing of
acquisition doesn’t occur within 15 months (i.e., before February, 2019) from
the date of agreement, Seller will retain USD 500,000 as penalty and balance
USD 6,000,000) shall be refunded to the Group within five calendar days.

 

As at 31^st
March, 2019 the acquisition as planned was not completed and the management of
the Company has represented that the term of the share purchase agreement has
been extended. In the absence of supporting convincing evidence and our
inability to send direct confirmation request to the Seller and the Corporation
on the revision of the terms including waiver of the penalty, due to not receiving
the communication address to which the confirmation requests were to be sent,
we are unable to comment on the recoverability of the amount of Rs. 4,505.80
lakhs (equivalent to USD 6,500,000) included under Note 9 as ‘advances towards
acquisition’, as at 31^st March, 2019 and the consequential impact,
if any, on the Statement.

 

12.     Regulatory compliances

12.1. We are unable to conclude on the consequential
impact, if any, on the operations and the financial performance of the Group
arising out of the following matters pertaining to non-compliance with the
provisions of the Companies Act, 2013 and notifications issued by the
Securities and Exchange Board of India (SEBI), as applicable:

(a)      In the absence of appropriate processes for
identifying related parties in view of the matters reported in paragraph 4(b)
above, we are unable to comment on the accuracy and completeness of the related
parties identified and disclosed by the Company including compliance with
obtaining necessary approvals, as required, from those charged with governance.

 

(b)     It was noted that in the case of two of the
directors who were re-appointed at the Annual General Meeting (AGM) held on 18^th
September, 2015 and designated as independent directors (one was also the
Chairman of the Audit Committee and the other a member of the Nomination and
Remuneration Committee and also the Chairman of the Stakeholder Relationship
Committee), they may have ceased to be independent directors under the Act with
effect from 17^th November, 2015 and 12^th August, 2015, respectively, being the date from when their
relatives were employed either with the Company or its subsidiary. These
directors have been designated as non-independent directors by the Company from
6^th September, 2019 and 13^th February, 2019,
respectively.

 

Considering
the above, we are unable to opine on the validity of the meetings of the Board
of Directors, Audit Committee, Stakeholder Relationship Committee and
Nomination and Remuneration Committee, in regards to the quorum in such meetings
and the resolutions approved in those meetings from the aforesaid AGM date
until the dates when the Company designated them as non-independent directors.

 

12.2. We are unable to conclude on the consequential
impact, if any, on the Statement arising out of the matters pertaining to
non-compliance by the Holding Company with the applicable master directions /
notifications issued by the Reserve Bank of India (RBI) and provisions of the
Foreign Exchange Management Act, 1999, as amended, in respect of the following:

 

(a)      The Holding Company has export trade
receivables and foreign currency interest receivable aggregating Rs. 3,037.28
lakhs and Rs. 336.13 lakhs, respectively, including intra-group receivables
which amounts, as at 31^st March, 2019, were outstanding for more
than nine months from the invoice date, which is beyond the time limit
stipulated under the Foreign Exchange Management (Export of Goods &
Services) Regulations, 2015, for repatriation of foreign currency receivables.

 

(b)     As at 31^st March, 2019 the
Company had not made the necessary intimations to the authorised dealer / RBI
as required under the Master Directions provided by the RBI on Foreign
Investment in India for loan / collaterals / pledge received from the promoter
of the Company, being a resident outside India, amounting to Rs. 1,395.02 lakhs
during the year ended 31^st March, 2019.

 

However,
subsequent to the year-end, the Company has made an intimation to the
authorised dealer on 12^th July, 2019 and is yet to make an
application for condonation of delay.

 

(c)      It appears that the Holding Company has
provided a corporate guarantee to Columbia Bank for a line of credit availed by
two of the subsidiaries in the Group aggregating USD 5,000,000 on 12^th
September, 2018. As per the loan sanction document issued by Columbia Bank, the
line of credit was approved by Columbia Bank, based on a representation by the
Managing Director of the Holding Company that the corporate guarantee was
approved by the shareholders of the Holding Company.

 

We have not been provided with minutes of the meeting of the
shareholders referred above approving such corporate guarantee. Further, the
Company has also not intimated the authorised dealer for providing such
corporate guarantee as required under the Master Directions provided by the RBI
on Direct Investment by Residents in Joint Venture (JV) / Wholly-Owned
Subsidiary (WOS) Abroad.

 

12.3. Further, the Holding Company has not carried
out a comprehensive review of compliance with laws and regulations and
therefore we are unable to comment if there are any other instances of
non-compliance with laws and regulations and any consequential impact thereof.

 

13.     Information / clarifications requested
but not provided

During the
course of our audit, we have requested from the management various information
and clarifications that were required for the purposes of our audit. In
addition to the information and clarifications pending in respect of the
matters described in paragraphs 4 to 12 above, information, inter alia,
relating to assessment of how the revenue recognised by the Group was in
compliance with the provisions of Ind AS 115, documentation supporting
evaluation of expected credit losses as at 31^st March, 2019,
information of payroll costs recognised in some of the subsidiaries,
confirmation of balances from customers, vendors and other parties, etc., are
also pending to be provided to / received by us. In view of such pending
information, we have not been able to obtain sufficient appropriate evidence to
conclude on those matters to express an opinion on the Statement.

 

14.     Book Entries

In view of
the matters described in paragraphs 4, 6.3, 7, 8, 10 and 13 of the Basis for
Disclaimer of Opinion section of our report, we are unable to state if any of
the transactions referred to in those paragraphs were represented by mere book
entries.

 

15.     Use of going concern assumption

In view of
the matters reported in paragraphs 4 to 14 above, and in the absence of
reliable cash flow projections by the management, and any consequential impact
of those matters on the Statement and operations of the Group, we are unable to
comment on the appropriateness of the going concern assumption adopted by the
management in the preparation of the Statement.

16.     The Statement includes the results of the
following entities:

(i)     8K Miles Software Services Limited (‘the
Parent’)

(ii)     8K Miles Software Services Inc. USA, the
Subsidiary

(iii)    8K Miles Health Cloud Inc. USA, the
Wholly-Owned Subsidiary

(iv)    8K Miles Software Services FZE UAE, the
Wholly-Owned Subsidiary

(v)   Mentor
Minds Solutions & Services Inc. USA, the Wholly-Owned Subsidiary

(vi)    Nexage Technologies USA Inc., the Step-down
Subsidiary

(vii)   Cornerstone Advisors Group LLC, the Step-down Subsidiary

(viii) Serj Solutions Inc. USA, the Step-down
Subsidiary

 

17.     Because of the significance
of the matters described in paragraphs 4 to 15 above, we have not been able to
obtain sufficient appropriate audit evidence to provide a basis for an audit
opinion as to whether the Statement:

a.       is
presented in accordance with the requirements of Regulation 33 of the SEBI
(Listing Obligations and Disclosure Requirements) Regulations, 2015, as
modified by Circular No. CIR/CFD/FAC/62/2016 dated 5^th July, 2016;
and

b.      gives a true and fair view in conformity with the aforesaid Indian
Accounting Standards and other accounting principles generally accepted in
India of the net profit, total comprehensive income and other financial
information of the Group for the year ended 31^st March, 2019.

 

The BCAJ
reader can read Management Response on Auditor’s Opinion in the annual report
of the company.