The Auditor Is In

After a private meeting with officials of the Finance Ministry yesterday, Anil Ambani the Chairman of the R-ADAG group walked calmly into his car flashing a silent grin at the peering eyes of the media. At first the conclusion reached was that this was a routine meeting regarding the gas dispute that he is fighting with his elder brother Mukesh in the Supreme Court. As we now know, this is false. Anil Ambani is now trying to put out a fire that has engulfed his telecom company Reliance Communications (RCOM). One factor has however remained the same; this latest issue promises to become yet another brother vs. brother fight.

The government has ordered an independent audit of every Indian telecom company.The audit is being overseen by the Department Of Telecommunications and the Telecom Regulatory Authority of India (TRAI).

RCOM is in the news because the Auditor's Report has indicated that the company has overstated its revenues and accused it of wrong accounting practices .If you read the subtext RCOM is being accused of fraudulent practices and lying.

Now this is indeed a serious offence. It’s the same thing that the ex-chairman of Satyam Computers Ramalinga Raju is accused of; an offence which has seen him being jailed .Remember that Raju himself admitted that he had overinflated the revenues of his company in the Satyam balance sheet.

RCOM knows that the way out of this mess is to deal directly with the one authority capable of discrediting the auditor’s report: The Government. Now wonder then that Anil Ambani has been quick on his feet realizing what he must do and whom he must meet to get RCOM out of this mess.

As far as RCOM itself goes, the company’s internal audit has been done by KPMG.RCOM has said that its accounts are in order.

To an outsider the question becomes which auditor’s report do I trust? A question lot more pertinent especially if one is a shareholder.

This is a query Mr. Ambani is himself trying to clear up. He has accused the external audit of being under the influence of a ‘known corporate rival’. Dig under the surface and it doesn’t take long to figure out that he’s talking about his brother Mukesh Ambani and his portion of the Reliance Empire. He has also accused the media of being “mischievous” with its intent.

In the near future the immediate impact of this entire matter will play out on the share price of RCOM.

Anil Ambani has also asked SEBI to investigate the sudden fall in the share price of RCOM.

At first the fall in RCOM was attributed to the telecom sector being underweight. Bharti Airtel and Idea cellular too have fallen in the past few trading sessions.

But RCOM’s fall has by far been the sharpest. There is a definite case to say that the news of the auditors report has been factored in much before definite news of the whole matter got out.

Anil Ambani is therefore justified in asking for a SEBI probe regarding the fall in the shares of RCOM.

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