ICAI to flag concerns about Byju’s financials

Separately, a disciplinary committee of ICAI is expected to issue notice to Deloitte Haskins & Sells’ audit partner, who signed off on these financial statements for allegedly not having done enough regarding alleged weaknesses in the accounts, one of the people said.

ICAI’s concerns around the financial statements come in the context of “multiple issues" noticed during scrutiny of the financial statements by its Financial Reporting Review Board (FRRB). ICAI’s key concern is around the way that Byju’s has recognized revenue from its principal business—the sale of educational tablets and SD cards and streaming of content, the person cited above said on condition of anonymity.

ICAI is contemplating approaching the ministry of corporate affairs because the audit regulator’s jurisdiction is limited to the professional who signed off on the financial statements and did not cover the management, which prepares these documents, the person explained. Emails sent to spokespeople for Byju’s, Deloitte and ICAI on Sunday seeking comments for the story remained unanswered.

The regulatory documents filed by Byju’s show that the auditor did not make any adverse remarks in their report for FY20. But that changed in the audit report for the subsequent fiscal year.

The auditor highlighted alleged material weakness in the company’s internal financial controls, including revenue recognition relating to the assessment of customer contracts, evaluation of the probability of collection, and the fair value of guarantees in the FY21 audit report. Besides the adverse opinion regarding allegedly not having adequate and effective internal financial controls over financial reporting, the audit partner also highlighted in the FY21 report that the company had not recognized ₹1,156 crore revenue from the transfer of products because it did not meet the criteria for collection on the date of the transfer. The company reported a standalone loss of ₹2,702 crore in FY21 audited results, compared to a retrospectively adjusted ₹7 crore profit (previously reported ₹50 crore profit) in FY20. Revenue recognition change on streaming services warranted the retrospective change.

The first person cited above said all these facts had been taken into account by ICAI’s FRRB before referring the matter to the disciplinary panel and that the auditor “should have done more". However, the FRRB review does not go beyond the reported financial statements into other audit documents, which is the purview of the disciplinary panel. These documents, said an industry executive, may throw more light into the clarifications sought by the auditor and the explanations given by the company management.

In the FY21 audit report, the auditor also made detailed clarifications about revenue recognition, saying that in the case of the sale of content via SD cards, the company does not have any continuing performance obligations once the content-filled SD cards are made available to the customers and sale of edtech products (which includes the sale of tablets) are recognized at a point in time. However, in the case of the sale of educational content in the form of streaming services, revenue is recognized over the period of time the services are rendered to the customers.

The company’s revenue recognition warranted a re-look due to the pandemic, which necessitated business model adaptation, according to the industry executive, who spoke on condition of anonymity. Byju’s had given detailed explanations in its FY21 financial statements about the concerns raised by the auditor.