DHFLs Auditors Raise Several Red Flags

Dewan Housing Finance Limited (DHFL), which took a sharp knock, post its March quarter results, owing to several unsettling commentary by the management in the notes to account, is likely to tank further, as auditors raise several red flags around the reported results.

While stating that they were unable to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion, the auditors put out several qualifications and disclaimers. Importantly, the auditors have raised concerns over the ability of the company to continue as a going concern.

“All these developments raise a significant doubt on the ability of the company to continue as a going concern and therefore it may be unable to realise its assets and discharge its liabilities including potential liabilities in the normal course of business”, the auditors- Chaturvedi & Shah LLP and Deloitte Haskins & Sells LLP stated.

The company had declared its March quarter results on July 13 (after months of delay). It had reported a loss of Rs 2,223 crore in the March quarter. The board on Monday had approved the audited results; the auditors have put forth several qualifications that could have a material impact on the financial statements of the company, clouding its ability to monetize its assets, secure funding from bankers /rope in a strategic partner and restart its operations (disbursements).

Also read: DHFL reports standalone net loss of Rs 2223 cr in Q4FY19

Qualification details

In one of the notes to the March quarter results, significant documentation deficiencies with respect to grant or rollover of Inter-corporate deposits (ICDs) were mentioned and that the company was working to remedy them. The auditors have stated that they have not been provided sufficient evidence to support the management's assessment and “hence are unable to evaluate on the recoverability of the ICD and the consequential effect on the Statement”. As of March 2019, ICDs outstanding stood at ₹5,652 crore.

Post the Cobrapost allegations, the report by Independent Chartered Accountants looking into the allegations, had highlighted certain procedural and documentation lapses (end use monitoring of the funds loaned not performed). The company’s actions in regard to such loans is pending. The auditors stated that they were unable to determine if these allegations would have an impact and whether any adjustments to the carrying value of the loans granted are required.

In the notes to account of the March quarter results, DHFL had also stated that in respect of loans of about

a) ₹16,487 crore, cheques received from the borrowers were initially recorded in certain customer accounts for receipts, despite the cheques not been deposited in the banks and were later reversed

b)It had also flagged some lacunae in the documentation of project/mortgage loans amounting to ₹20,750 crore

c) It had also marked down value of loans (wholesale) aggregating ₹34,818 crore. These were reclassified as Fair Value Through Profit or loss (FVTPl) under Ind AS 109; the resultant fair value loss of ₹3,190 crore was charged to P&L.

In respect of all these, the auditors stated that they were unable to obtain sufficient evidence to support the values of the loans and determine if these would have an impact. The auditors were also not able to comment on the assumption made relating to expected credit loss (ECL) that had gone up sharply in the March quarter.

The auditors were unable to determine if the observations made by the National Housing Bank (NHB) pertaining to DHFL's Capital Adequacy Ratio as at March 31, 2018 would have an impact. NHB had observed that the company’s capital adequacy should have been 10.24 per cent (against reported 15.3 per cent).

Material uncertainty related to Going Concern

Importantly, the auditors stated that the qualifications laid down by them may have an impact on the company's ability to continue as a going concern. “The ability of the company to continue as a going concern inter alia is dependent upon its ability to monetize its assets, secure funding from the bankers or investors, restructure its liabilities and recommence its operations, which are not wholly within control of the Company.”

On Monday, the stocks of DHFL closed 1.41 per cent lower at ₹52.60. Shares in DHFL have slid 78 per cent this year.