The curious case of Infibeam vs auditor

Infibeam Avenues has called an extraordinary general meeting on May 30 to ratify its board’s decision to fire the auditors, SRBC & Co. The matter will then be put up for approval of regulatory authorities. The audit arm of EY would probably be happy if Infibeam shareholders give their stamp of approval to the proposal. 

That’s because SRBC apparently wanted to resign much earlier, but the market regulator did not allow it to do so for reasons unknown. In that context, SRBC must be hoping that the Infibeam EGM hastens its exit. The reason is obvious: The trust factor between the company and its auditor has been zero for quite some time, leading to public mudslinging. While it’s natural for the relationship between a company and its auditors to be delicate, they certainly can’t become adversaries. In this case, adversary is too mild a term to describe the relationship between Infibeam and SRBC, which took up the audit assignment in September 2016. KPMG was then the joint auditor but it resigned during financial year 2017-18. 

The EY arm’s misery is, however, unlikely to end after Infibeam’s EGM as the company has made a serious charge of insider trading. Leakage of unpublished price sensitive information is a violation of Sebi insider trading norms and if proven, is a serious lapse of auditor responsibility. Infibeam has also written to the National Financial Reporting Authority (NFRA) and the ministry of corporate affairs (MCA). The regulation to prevent insider trading requires that no insider shall communicate, provide, or allow access to any unpublished price sensitive information of a company to any person unless in the furtherance of legitimate purposes. A violation of insider trading rules can lead to a fine of Rs 25 crore and being barred from securities markets.

In its complaint, Infibeam has cited SRBC’s admission that one of its employees had passed on information about the company’s quarterly financial results to various third parties prior to such results being disclosed to the stock exchanges on multiple occasions leading to breach of trust and loss of faith. On its part, SRBC has denied the allegations. Its argument goes like this: SRBC examined official email accounts of 28 audit team members who worked on the Infibeam account between November 2016 and February 2019. On one occasion, one employee “inadvertently” sent some information to a third party — a chief financial officer of another company by mistake. The audit firm thinks it was a genuine mistake. The CFO’s name was the same as that of his boss, and the mail was marked to Infibeam as well. Nobody, it argues, would try to do insider trading through a mail where the company officials are also marked.

The matter is surely serious, but Infibeam is perhaps taking it as a golden opportunity to get rid of its auditor. After all, SRBC has already offered itself for a third party/regulatory investigation. So why make such a big song and dance about it? 

Infibeam had its fair share of other controversies as well. A WhatsApp message alleging lack of corporate governance had eroded about Rs 9,200 crore market capitalisation in a single day last year. It was the largest stock fall after Satyam Computers Services in January 2009.

That all is not well between the two has been evident for some time now. SRBC qualified the company’s results for nearly three quarters, and had raised questions about Rs 122 crore advances to subsidiaries, which on-lent the amount to project vendors. The management failed to clarify and provide adequate information about the rationale behind the transaction, terms and conditions and how it selected the vendors, according to the auditors. They had also raised concerns about the lack of “robust documentation” for Rs 32 crore revenue recognised during the quarter and have asked the company to perform an independent investigation in relation to certain matters connected to Infibeam’s merger with Avenues India Pvt Ltd, which operated payment gateway CCAvenue. Infibeam had acquired the company at a valuation of Rs 2,000 crore in an all-stock deal. 

While Infibeam’s decision to fire the auditor and raise insider trading charges against it may not be a case of tit for tat, this aspect needs to be investigated. The role of the audit committee also should be looked into — did the committee inform Sebi after discovering the alleged insider trading norm breaches by the auditor? 

This sordid saga could have perhaps been avoided if Sebi had allowed SRBC to resign much earlier. After all, SRBC was not the only auditor to have offered to resign, and its request should have been accepted if it had given enough disclosure on the reasons. To avoid such confusion, Sebi must come out with detailed disclosure requirements for allowing an auditor to resign. The entire auditing fraternity and India Inc would now wait for the results of the investigations.