Hindenburg’s Adani strike adds pressure on already wary auditors

By Anders Melin and Anto Antony

After a few painful months, Adani Group seemed to finally have shaken off the surprise attack from short seller Hindenburg Research.

Then Deloitte Haskins & Sells, a global behemoth and one of the biggest auditors in India, brought some of the questions about the rise of billionaire Gautam Adani’s empire back to the fore.

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The world’s largest accounting firm became the first of its kind to cite specific Hindenburg allegations when it issued a rare “qualified opinion” on May 30 about the financials of Adani Ports & Special Economic Zone — often touted as the massive conglomerate’s crown jewel. The audit raised red flags over transactions with certain entities the company said are unrelated parties, but which Deloitte couldn’t confirm.

The company considered it unnecessary to get an independent external examination over details of the relationships in question, citing an ongoing probe into Hindenburg’s allegations by India’s securities regulator, according to Deloitte’s report.

It isn’t the first time an auditor has expressed reservations about a slice of the Adani Group.

The partner at EY member firm SR Batliboi who signed off for four years on Adani Power Ltd’s financials did so with repeated qualified opinions. He asked to step aside in 2022, and many other partners declined to take over because they were uncomfortable vouching for the company’s books, according to people familiar with the firm, who asked not to be identified discussing private matters they weren’t authorised to speak about publicly. The account was ultimately given to a newly promoted partner.

BSR & Co, a member of global accounting giant KPMG that resigned as co-auditor of Adani Green Energy in 2021, turned down a request by the conglomerate to audit some of its other companies amid heightened scrutiny of India’s accounting industry, according to people familiar with the firm.

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Questions about finances and governance have trailed Adani Group ever since Hindenburg’s allegations of fraud erased more than $100 billion from the group’s market value. US authorities are looking into what representations the conglomerate made to its American investors, sending inquiries in recent months to institutions with large Adani holdings, Bloomberg reported Thursday.

Hindenburg has criticised Adani’s use of a little-known firm to vet the books of its flagship unit, while accounting experts from Shivaram Rajgopal at Columbia Business School to R Narayanaswamy, who was a longtime professor at Indian Institute of Management Bangalore, say the conglomerate’s patchwork of roughly 40 audit firms exposes its financials to varying staff quality and thresholds for material misstatements.

Deloitte, for its part, emphasised its limited scope in its report, noting it’s not the statutory auditor for most Adani Group companies.

Adani Group has denied all allegations of wrongdoing. A spokesperson, in written comments, said eight of its 10 listed companies are audited by some of the world’s biggest accounting firms and dismissed concerns that its statutory auditors — those that ultimately sign off on financial statements — lack sufficient oversight.

The conglomerate uses many medium-sized firms to comply with regulatory requirements, the spokesperson said. Other Indian conglomerates, like Tata Group and Reliance Industries Ltd, also employ a breadth of accountants, according to regulatory filings.

High stakes

The stakes are high for auditors in India. The National Financial Reporting Authority, a regulator formed in 2018, has cracked down on auditors not only for allegedly breaking the law, but also for not properly doing their jobs. Over the past five years, it has sought to debar at least 20 people.

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In India’s community of more than 100,000 chartered accountants, the enforcement has had a chilling effect and made some unwilling to take on clients considered risky, said Shriram Subramanian, founder of Bangalore-based proxy adviser InGovern Research Services.

“They would rather let go of an audit revenue than stake their reputation,” Subramanian said.

In the case of Adani Group, which transformed from a regional business into a behemoth with a nearly $300 billion combined market value in the span of just a decade, Hindenburg’s January 24 report calling it the “largest con in corporate history” added to enduring questions about its intermingled money flows.

Like many family-owned conglomerates in India, it operates a sprawl of businesses, spread across 10 publicly traded companies and hundreds of closely held entities. Between these, thousands of transactions occur each year, filings show.

Power disagreement

At S R Batliboi, a longtime auditor of several Adani Group companies, scores of partners have declined to be involved in auditing some of them in recent years, according to people familiar with the firm, who requested anonymity to talk about internal matters.

Partner Navin Agrawal’s recurring disagreements over how Adani Power valued its flagship Mundra power plant are unusual, Bloomberg News has reported.

After he asked to step aside last year, S R Batliboi promoted Santosh Agarwal, a longtime employee, to partner and assigned him three Adani companies: Adani Power, Adani Green Energy and Adani Wilmar, three of the people said.

Santosh Agarwal has struggled to find a second partner among his roughly 100 peers willing to vouch for the books, the people said. S R Batliboi eventually assigned a non-equity partner for the task — an unusual step because such auditors are more junior and less likely to serve as a second signatory for large public companies, they said.

An SR Batliboi representative declined to comment.

BSR ended a three-year run as co-auditor of Adani Green Energy two years earlier than what’s stipulated for such appointments in India’s Companies Act of 2013. Its caution over taking on other Adani assignments stemmed from investigations into its audit lapses at non-Adani companies, two people familiar with the matter said.

Adani Group’s spokesperson said the unit rotated auditors in “the normal course of business.” A KPMG representative declined to comment.

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Small auditor

Adani Group employs some of the largest firms both for audits and non-audit assignments. It has pointed out that S R Batliboi and Deloitte have long been the statutory auditors for many of its public companies.

However, a large swath of Adani Group has for years been overseen by an auditor that’s remarkably small in comparison to those top firms.

Shah Dhandharia & Co has five partners, most in their 20s and relatively new to the industry. Between 2018 and 2022, the firm was statutory auditor of Adani Enterprises, Adani Total Gas and Adani Wilmar. In fiscal 2022, the three accounted for around two-thirds of conglomerate’s total revenue.

The firm’s youngest partners have signed the financial statements in most years — a red flag to some observers.

“We raise concerns over the quality of the audit,” proxy adviser Institutional Investor Advisory Services wrote to clients about Adani Enterprises last year, saying it believed the signing partner didn’t have sufficient experience.

Shah Dhandharia didn’t respond to a request for comment. The firm “has an excellent track record and deep expertise in relevant areas,” Adani Group’s spokesperson said, adding that its appointment has followed regulatory requirements.

Today, Shah Dhandharia is the statutory auditor only for Adani Enterprises, the group’s biggest and most complex company.

Fragmented picture

For Shivaram Rajgopal, an accounting professor at Columbia Business School, another concern is that roughly 40 firms audited different parts of Adani Group’s listed companies for the year ended March 2022, creating a fragmented picture relative to global accounting standards.

Filings show the companies’ statutory auditors only directly audited entities that held about 60 per cent of the group’s total assets and brought in roughly 75 per cent of its total revenue. The rest was assessed by an assortment of mostly smaller firms.

In most major economies, auditing standards hold a statutory auditor responsible for a company’s entire financial results, even if other firms audited some subsidiaries. But in India, the statutory auditor is held accountable only for the parts it audits directly.

“Who is making sure that all the pieces of the enterprise fit together?” Rajgopal said. “Which auditor?”

Adani Group’s spokesperson said each statutory auditor must conduct a “limited review” of work done by other firms on subsidiaries whose accounts flow into the consolidated results. The spokesperson also said the conglomerate’s lead auditors evaluated 88 per cent of its total revenue from operations in fiscal 2023.

As a result, each lead auditor has oversight of the entire company’s finances, the spokesperson said.

But Narayanaswamy, who for decades taught accounting at Indian Institute of Management Bangalore, said fragmentation dilutes overall audit quality by narrowing each firm’s scope. Eight other accounting experts interviewed by Bloomberg News echoed this notion.

Review rebukes

At Indian conglomerate Tata, firms like PwC and BSR have in recent years signed off on its biggest entities. Reliance, controlled by billionaire Mukesh Ambani, last year named Deloitte its statutory auditor, with a smaller Mumbai-based firm as co-auditor.

In response to Hindenburg’s accusations, Adani Group emphasised it has employed big audit firms to undertake a range of reviews of its finances and disclosures.

It said audit giant Grant Thornton did a general review of its companies in fiscal years 2020 and 2021, and that it last year appointed Deloitte “and many other auditing firms for doing a health checkup exercise for all business.” More recently, Adani Group said it undertook an internal review of Hindenburg’s allegations and obtained opinions from independent law firms, finding no wrongdoing.

Deloitte, which audits both Adani Ports and Adani Transmission, said in its opinions for the companies’ 2023 financials that Adani Group’s internal review “does not constitute sufficient appropriate audit evidence for the purposes of our audit.”

Experts say it’s impossible to know the rigor and findings of reviews, because Adani Group isn’t required to disclose them. The company spokesperson said they’re done “for process and internal control improvement and to enhance governance.”

In fact, big accounting firms sometimes do reviews hoping for more lucrative work later, said Francine McKenna, an accounting lecturer at University of Pennsylvania’s Wharton School, adding that they still may turn down business with a company entangled in controversy to avoid getting drawn in.

“Reactive reviews don’t give confidence to markets or regulators or anybody,” McKenna said. They “shouldn’t replace audits completed according to required standards.”