Deloitte to Quit as Adani Ports’ Auditor: A Red Flag for Investors?

Deloitte’s Likely Resignation as Auditor of Adani Ports: What Does It Mean for the Company and the Investors?

Adani Ports & Special Economic Zone Ltd., India’s largest port operator and a part of the Adani Group, is facing a major setback as its auditor Deloitte Haskins & Sells LLP is planning to resign, according to sources with knowledge of the matter. This move comes weeks after Deloitte raised concerns over certain transactions between Adani Ports and three entities that were flagged in a report by US short-seller Hindenburg Research. The reason for the resignation was not immediately known, and Deloitte declined to comment.

In this blog post, we will analyse the implications of Deloitte’s likely resignation as auditor of Adani Ports, and how it will affect the company’s financial performance, governance, and reputation. We will also discuss the possible impact on the investors’ confidence and the stock price of Adani Ports.

Background of the Issue

Deloitte Haskins & Sells LLP has been the auditor of Adani Ports since 2015 and was reappointed for another five years in 2020. However, in May 2021, Deloitte issued a qualified opinion on the financial statements of Adani Ports for the year ended March 31, 2021. A qualified opinion means that the auditor has some reservations or limitations about the financial statements, and cannot express an unqualified or clean opinion.

Deloitte stated that it could not verify Adani Ports’ claims that three entities - Krishnapatnam Port Company Ltd., Sarguja Rail Corridor Pvt. Ltd., and Allogeneic Stem Cell Bank Pvt. Ltd. - were unrelated parties, as alleged by Hindenburg Research in its report published in February 2021. Hindenburg Research had accused Adani Ports of inflating its earnings and assets by engaging in dubious transactions with these entities, which it claimed were controlled by Gautam Adani’s brother Vinod Adani.

Deloitte also stated that it could not determine if Adani Ports was fully compliant with the Foreign Exchange Management Act (FEMA), 1999, and the regulations issued thereunder, as it did not receive sufficient and appropriate audit evidence from the management regarding certain foreign currency transactions involving these entities.

Deloitte’s qualified opinion raised doubts about the accuracy and reliability of Adani Ports’ financial statements and also exposed the company to potential regulatory actions and penalties for violating FEMA rules.

Implications for Adani Ports

Deloitte’s likely resignation as auditor of Adani Ports will have serious implications for the company, as it will:

• Hurt its credibility and reputation: Deloitte’s resignation will indicate that there is a serious disagreement or dispute between the auditor and the management of Adani Ports regarding the accounting and reporting of certain transactions. This will damage the credibility and reputation of Adani Ports, as it will suggest that the company has something to hide or is not transparent about its financial affairs. This will also tarnish the image of the Adani Group, which has been facing allegations of accounting fraud and market manipulation by Hindenburg Research and other critics.
• Impact on its financial performance: Deloitte’s resignation will also impact the financial performance of Adani Ports, as it will delay or disrupt the audit process and the publication of its financial results. This will affect the company’s ability to raise funds from lenders and investors, as they will demand higher interest rates or discounts to compensate for the increased risk and uncertainty. This will also affect the company’s ability to execute its growth plans, such as expanding its port capacity, acquiring new assets, and entering new markets.
• Expose it to regulatory actions and penalties: Deloitte’s resignation will also expose Adani Ports to regulatory actions and penalties from various authorities, such as the Securities and Exchange Board of India (SEBI), the Reserve Bank of India (RBI), the Income Tax Department, and

Conclusion

Deloitte’s likely resignation as auditor of Adani Ports is a serious blow to the company’s credibility and reputation. It indicates that there is a significant disagreement or dispute between the auditor and the management of Adani Ports regarding the accounting and reporting of certain transactions. It also exposes the company to potential regulatory actions and penalties for violating FEMA rules.

Deloitte’s resignation will also impact the financial performance of Adani Ports, as it will delay or disrupt the audit process and the publication of its financial results. It will affect the company’s ability to raise funds from lenders and investors, as they will demand higher interest rates or discounts to compensate for the increased risk and uncertainty. It will also affect the company’s ability to execute its growth plans, such as expanding its port capacity, acquiring new assets, and entering new markets.

Deloitte’s resignation will also have an impact on the investors’ confidence and the stock price of Adani Ports, which has been on a strong uptrend in the past year. The stock price may fall or stagnate as investors may lose trust in the company’s financial statements and governance. Investors may also face legal risks if they are found to have traded on insider information or false disclosures.

Therefore, Deloitte’s likely resignation as auditor of Adani Ports is a major setback for the company and its shareholders. It is a rare example of an auditor quitting a large and reputed company over accounting issues. It raises doubts about the accuracy and reliability of Adani Ports’ financial statements and also tarnishes the image of the Adani Group, which has been facing allegations of accounting fraud and market manipulation by Hindenburg Research and other critics.