CAG to RIL: 'WhatSAP with the data?'

Why did the RIL stock jump after the CAG made a damning statement about lack of access to audit data?

Reliance Industries’ (RIL) stock jumped 2-3% on Friday soon after the Comptroller and Auditor General Report was tabled in the Parliament. Various reasons have been floated for the spike. Initial reports said that RIL had been allowed to recover $160 million (roughly Rs 960 crore) on its KG-D6 block. That’s chickenfeed for a company that clocked revenue of Rs 96,486 crore in September quarter, I thought. Does it deserve a 3% jump? 

By evening, it turned out the CAG had actually disallowed this sum claimed on account of three “unauthorised” wells. While some reports have talked about the $427 million recoveries allowed in ‘national interest’ by the government’s principal auditor, others quoted a total of $970 million, on which the CAG had raised red flags over on various counts.  The CAG also observed that Reliance has recovered $9.2 billion out of the $10.44 billion invested in the field till March 2013.  

In any case, all these figures were digested and the stock is back to levels below last Thursday’s close as I write this. It’s difficult to make out from the stock movement what the CAG report actually meant. May be it will play out over a longer term when crude related uncertainties peter out. 

But in those early hours, was the market seeing the glass which was 90% full rather than focusing on the empty part? 

A clue came for those who attended the CAG press briefing during the lead auditor’s presentation.  He talked about how the contractor did not share complete records on its accounting system, which ran on the popular Enterprise Resource Planning (ERP) software called SAP. In simple words, SAP helps organize and manage data from different verticals such as sales, procurement, human resources, accounting at one place to give the whole picture of a company’s operations.  “They provided the complete manual records. But for SAP they did not give full access,” the auditor said.

The accounts of all domestic blocks belonging to RIL were maintained in a SAP ERP system. The books of each block are inter-linked in SAP. The auditors are given customized profiles to access the system. However, the auditors observed that these customized profiles were useless for their audits. 

“With complete access to all modules of SAP one can download the data of all transactions pertaining to this and analyse selected data in various and complex ways, which is not possible in the SAP system itself. However, in case of customized profiles, as given to the auditors of the operator, it was not possible to extract the required data in all the cases and perform the analysis,” the report said.  

The audit report dedicates an entire sub chapter (2.3.1) titled ‘Restricted access to SAP’ containing several paragraphs to explain the constraints it faced while auditing the books of the contractor. 

A similar issue was raised during the previous audit in 2010-11 after which the  Ministry of Petroleum and Natural Gas had promised to give necessary instructions through the management committee for ‘making changes in system configuration, as desired by audit.’ However, CAG found that the ministry eventually did not issue any such instruction through the management committee.  

The report gets into further details where after further correspondence, the auditors were allowed some additional access in September 2013. But this did not include access to key areas such as sales & distribution, project system, assets accounting, bank accounting, audit information system etc. 
 

More stonewalling was in store when the auditors tried to download the data from this limited ‘additional access’. 

Extracting gas from sea might have been easier than getting what they wanted from the contractor. They found that the domain computer did not allow them to copy such downloaded data into pen drives or other external storage devices such as DVD, leading them to note that “… therefore this downloaded data was of little use to audit.”

Further verbal and written pleas followed for providing data on DVD. By the time some DVDs came, it was already the end of audit duration. “Thus, the operator, in spite of having information on audit schedule, gave fragmented information, that too, after considerable delay.”

In an exit conference conducted in June, RIL cited its security and confidentiality policy, which makes it ‘naturally’ difficult for outsiders to access SAP. “In spite of these constraints, all assistance was provided to the CAG’s audit team with sufficient information to carry out an audit under section 1.9 of the Accounting procedure of the PSC,” RIL said. 

CAG contends that there is difference between what is ‘sufficient’ and ‘complete /requisite.' Further, It said what the operator contends as sufficient may not be sufficient in the auditors view. It said it was insisting on SAP access because, “The information provided by the operator was found to be incomplete again and again” and that RIL was not ready to certify that the information given was ‘complete’. 

In June 2014, the forgetful ministry, which gave the 2011 direction for reconfiguring system to allow access but did not follow up, after hearing the saga went back to Square One, saying “audit may specify any specific data that audit could not get” so that the contractor can be given “necessary instructions”. It also asked the CAG to quantify the contract cost left unaudited due to lack of access for disallowance. 

The CAG, realising that this would be another blind-men-feeling-an-elephant kind of exercise, quickly rejected the idea. “In this case, it is not possible to quantify the amounts due to restricted access,” it said. However, it recorded that the constraints have been adequately detailed in these chapters and operator may be asked to reconfigure SAP system to allow audit access across all modules. 

As we were walking out for tea after the press briefing, I asked the lead auditor if they faced similar issues with any of the other contractors. “No, only RIL,” he said.  Could you have taken a bigger sample, would the disallowances have increased? “We could certainly have taken a bigger sample,” he said.   

Another reporter was overheard murmuring about how the company has again managed to allow audit to happen on only what it wanted to be audited. 

Was it this little SAP story that excited the Street? Time will tell.

Separate subchapters (2.3.2 & 2.3.3) dealt with other audit constraints such as incomplete lists and non-production of documents. 

My mind went back to instances where a north Indian group played with regulators and tax officials with truckloads of documents and papers and CDs without passwords.   

If smaller sized companies can play the cat-and-mouse game with regulators and auditors, can the country’s largest corporation be far behind?

What say RIL? 

An email questionnaire sent to the RIL spokesperson on Tuesday evening remained unanswered. 
 

(N. Sundaresha Subramanian is associate editor, Business Standard)