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Other firms too have been using innovative accounting to swell profits

Khyati Dharamsi. Mumbai

While you are still thinking of how a blue chip company such as Satyam could forge their balance sheet, there are many others who are sculpting their books for the upcoming results. 

DNA Money checked the results declared in the past year and realised that various innovative accounting methods were being put to use in order to highlight quasi-profits. 

See for yourself how established firms too can paint a rosy picture, even though their real balance sheets are anything but rosy. 

TCS tried to show a higher profit figure in the first quarter of FY 2008. The profit increased by Rs 50 crore as the company expanded its depreciation policy to four years from the earlier two years. 

In the June quarter, DLF declared that 40% of its sale (highest to any customer) was to a company called DLF Assets (DAL), amounting to about Rs 1,560 crore. 

Jaiprakash Associates never accounted for forex losses in the first half of the current financial year. A brokerage firm noted in its report that had these losses been accounted for, the company's then balance sheet would have shown steep looses. 

The company also re-classified its contract manufacturing business revenues into API and formulations, which makes it difficult to analyse its segmental performance. 

An executive with a leading consulting and auditing firm had told DNA Money earlier, "Institute of Chartered Accountants in India (ICAI) has introduced AS-30-31, which relates to derivative accounting. It has been made recommendatory from April 1, 2009 and will be mandatory from April 1, 2011." 

However, the executive said that firms such as Wipro, Satyam, Maruti, Varun Shipping, etc have already started using AS-30-31 for accounting, even though there is limited guidance available. As a result, a comparison of the P&L account of these companies, against that of their rivals, doesn't give the correct picture. 

A company which has not adopted AS-30-31 would show higher losses as the gains have evaporated. Adoption has to be done on a single date by all firms." 

Prajay Engineers, a Hyderabad-based developer, in a quarterly result said that it has 'lost' records for a project, which accounted for 40% of its annual revenues. Auditors too mentioned in their report that they were not able to place income of Rs 143.77 crore and relevant construction cost of Rs 75.26 crore. 

Sobha Developers too changed its accounting norms in the first quarter of the year so that revenues could be recognised earlier in a project cycle. The company said, "Had the accounting policy not been changed, its first-quarter profit before tax would have been 20% lower." 

Jet Airways too had changed its depreciation methodology to swell the profits in a quarter when oil prices had been shooting up for any airline to escape losses. 

Sunil Talati, chairman of Financial Review Report Board of ICAI, said, "When the methodology of accounting depreciation is changed, it is done to ensure that the profit and loss account is burdened less and profit is more. In all such cases, there is a reason for changing the methodology." 

But where do you draw the line in deciding whether the change is a minor one, or awaits the fate of Satyam? 

ICAI is trying to take care of it, renowned CA's say. Talati said, "At the level of the institute (ICAI), we have made sure that the accounting standards are complied with. So a non-compliance of any accounting standards should ring a warning bell for the customers." 

He said, "Starting 2003, we have started a separate practice called the Financial Review Report Board (FRRB), which is involved in preparing a published account of failure on the management's part to comply with accounting standards. Till now a random selection of 50 companies was done for FRRB and this year 100 companies will be checked. More stringent action would be taken against the erring company." He said that there isn't enough machinery to keep a tab on all listed firms at the same time.

Also, analysts say that there is no proper law indicating how to account for Foreign Currency Convertible Bonds (FCCBs). However, a firm needs to revalue their liability. An analyst said, "Liability evolves if the bonds are not converted. Most companies never do it."

Another expert belonging to a consulting firm said, "FCCB is nothing but a loan. If I had taken a loan when the dollar was 40 and have to pay it back when the dollar is 50, the loss should hit my profit and loss (P&L) account. Instead firms show it in the share premium account."

To understand a company one plans to hold in his demat account better, a lay investor can seek help from CAs who hold sessions for people to understand balance sheets and profit and loss account.

d_khyati@dnaindia.net