26 Feb 10 Much ado about accounting: The Travails of Tech Mahindra
Last month, during earning’s season, the financial media and analyst community were up in arms over Tech Mahindra’s alleged “aggressive accounting methods”. The issue overshadowed all others during the analyst’s call, so much so, that Tech Mahindra’s vice-chairman Vineet Nayyar is quoted (in the Mint) as saying, “I’m sorry that this BT restructuring issue clouded the entire discussion,” and later “Perhaps we have fallen short in making an explanation.”
I personally believe that this is a case of “making mountains out of molehills”, and am still puzzled at the extent of outcry. The transactions were disclosed, not hidden! Many disagreed with the mode of accounting (lump sum or deferred). But, so what?
Every company has slightly differing accounting rules, especially for unusual transactions. As long as they’re disclosed, does the accounting matter? If analysts are unhappy, why can’t they re-work and “normalize” the earnings? Isn’t that something they’re supposedly trained to do?
Now let’s look at DLF’s merger with its “sister” company DAL. (Promoter owned Caraf Builders and Constructions Pvt. Ltd. owns DLF Assets Ltd (DAL) and will be merged with DLF’s wholly-owned subsidiary DLF Cyber City Developers Ltd.) The basis of the merger ratio has not been explained to shareholders or analysts, who have been told that this is on the basis of “expert” recommendations.
No details of assets or valuation of the unlisted private entity are provided, nor any explanation of receivables and other transactions between the listed and unlisted companies. Though the merger has attracted some criticism, few have questioned why DLF was allowed to get away for so long!. An unlisted, promoter owned company was the largest customer of DLF, and nobody bothered. Leave alone accounting, the nature and extent of the transactions themselves remain a mystery. Yet, until this merger was announced, analysts didn’t raise a hue and cry – despite the known fact that real estate deals in India are more likely to be murky than not.
I’ve been puzzling over why a relatively small accounting transgression by Tech Mahindra has got hammered, while a major and continuing lapse in basic governance (absence of disclosure of material facts) by DLF has been more or less accepted for several years.
The only conclusion I can draw is that there are different standards for different promoters. Maybe we now expect much more from the Mahindra’s than we do from most others.
While I’m sure the Tech Mahindra management feels unfairly picked on, they could draw solace from the fact that the Mahindra’s are now held to much higher governance standards. And if we expect more from Anand Mahindra and his team, it’s largely a function of the high governance standards they have set for themselves. Or look at it another way: a story about governance (or accounting) lapses at Mahindra are much more newsworthy than those about other Indian companies – simply because they’re rarer and surprising!