SEBI Order Against Brightcom Group: Were The Auditors Sleeping At The Wheel?

Overstatement of profit, failure to include results of foreign branches, conflict of interest were among Brightcom's audit lapses.

<div class="paragraphs"><p>(Image: pxhere)</p></div>
(Image: pxhere)

Highlighting 31 quarters of misstatements and nearly Rs 1,300 crore of irregularities, SEBI has passed an interim order against Brightcom Group Ltd. for an accounting fraud involving manipulation of financial statements.

In its April 13 order, the market regulator barred the directors of the Hyderabad-based ad-tech firm from disposing of their shares. It directed the audit committee to review the independence of the statutory auditors.

Brightcom overstated its profits and understated its expenses between 2014 and 2020, leading to a misstatement of Rs 868 crore, according to SEBI.

In its consolidated financial statements for FY20, the firm recorded an impairment of assets of Rs 868 crore. But no such disclosure was made in the standalone financial statements, indicating that the impairment was on account of subsidiaries. This charge, which should have been part of the profit and loss statement rather than the balance sheet, resulted in the company understating its losses by Rs 428 crore, the regulator said.

The company's accounting procedures for its intangible assets were irregular as well, it said.

Brightcom failed to categorise its assets into research and development phases in accordance with accounting standards, which led to the misstatement of intangible assets worth Rs 504 crore, overcapitalisation of intangible assets, and consequent inflation of profits, according to the regulator.

Non-disclosure of the commencement of a forensic audit, inconsistencies in the disclosure of shareholding pattern, and non-independence of the independent director are some of the other charges made against the company.

SEBI's order also reveals intentional fraud, such as offloading of shares by promoters during the period under investigation, incorrect disclosure of promoter shareholding, and preferential allotment of shares to entities that subsequently became part of the promoter group.

The fact that the promoters gave themselves preferential allotment of shares, which led to them increasing their shareholding from 3.51% to over 18.47% after the start of the SEBI investigation, speaks volumes of their intent to mislead and their brazen approach towards self-enrichment.
SEBI Order

Audit Lapses

SEBI said the statutory auditor failed to issue a qualified opinion on the financial statements as required by the auditing standards. Some of the other lapses highlighted by the regulator against the auditor, P. Murali & Co., include:

  • Failure to include the audit results of Brightcom's overseas branches.

  • Violation of norms relating to the independence of auditors. PCN and Associates, the auditors for the financial years 2017–2020, were closely associated with the previous auditor, P. Murali.

  • Murali Mohan Rao, partner at P Murali, had a close business relationship with Brightcom's registrar and transfer agent, Aarthi Consultants Pvt., in violation of the rules mandating independence.

  • Despite these disqualifications, P. Murali was again appointed auditor for five consecutive years, commencing September 2022.

Palace Heights Avenues LLP, one of the entities that got the preferential allotment, was later found to be under the direct ownership of Potukuchi Murali Mohan Rao and his wife, suggesting the active involvement of auditors in the scheme of manipulation, SEBI said.

Brightcom and audit firm P Murali are yet to respond to BQ Prime's queries seeking a response on SEBI's interim order.