Auditor picks holes in Pristyn Care’s ‘internal controls’

BSR & Co., the Indian affiliate of Big Four auditor KPMG, recently signed off on the much-delayed FY22 statements of GHV Advanced Care, which owns Pristyn Care. The company has yet to file the statements with the ministry of corporate affairs.

The auditor’s concerns appear in a ‘qualified opinion’ on so-called internal controls governing policies and procedures, which maintain the accuracy and integrity of financial statements. Internal controls apply to companies after they hit ₹50 crore in revenue. In its qualified opinion on Pristyn Care’s internal controls, the auditor noted material weaknesses related to three areas: pricing for hospitals and patients, agreements with doctors and the vendor selection process.

First, Pristyn Care “did not have internal controls for accurate determination of prices charged to patients or hospitals,” the auditor noted. Secondly, a Pristyn employee provided the auditor with “certain documentary evidence in relation to agreements with doctors, which were not genuine.” Internal controls in relation to “review and authorization of the calculation of doctor expenses” were partially based on “unsigned agreements,” the auditor said. Thirdly, Pristyn’s vendor selection process through competitive price analysis was not operating efficiently.

All of these concerns, BSR said, could result in an overstatement or understatement of revenue recognized, and an overstatement or understatement of expenses related to surgeries, doctors or patients in the books. For doctors, it could also result in incorrect disbursements, and in the case of vendors, it could result in unfavourable commercials for the company, the auditor said.

To be sure, many high-profile startups have raised auditors’ eyebrows regarding internal controls. The auditor for edtech giant Byju’s noted an ‘adverse opinion’ on its internal controls related to customer collections and revenue recognition in FY21, while auto service startup GoMechanic was found to have not established internal controls despite being required to do so.

On 30 August, Mint reported that BSR had earlier asked Pristyn Care to appoint a different agency to do an internal audit to “provide comfort” before signing off on the statements. Pristyn Care then appointed Grant Thornton to do the internal audit.

A KPMG spokesperson declined to comment, while a Grant Thornton spokesperson did not respond to a request for comment.

“We firmly reject the allegations made. Our FY 2021/2022 has also been signed off by our statutory auditors, which is one of the Big 4 firms. We would like to reiterate that the audit report on our financial statements is clean. The auditor has explicitly stated that, in their opinion, the financial statements present a true and fair view of the company’s state. This confirms that all revenue and expense lines are accurately and fairly represented, and the auditor was able to provide a firm and unambiguous opinion on each line item within the financials. Additionally, the auditor has provided valuable insights into the company’s process controls. They have emphasized that these recommendations do not in any way impact their opinion on the financial statements,” a Pristyn Care spokesperson said.

The spokesperson added that in FY22, Pristyn Care was “a mere three-year-old startup experiencing rapid growth by 200+% (compared to FY21) that too during a covid year. It is crucial to recognize that internal processes and controls evolve continuously in tandem with the company’s expansion and development. The auditor has emphasized the importance of strengthening our control environment related to service offering prices and documentation. It is important to emphasize that their feedback solely focuses on improving our documentation and storage of signed agreements. Once again, it is crucial to note that the financial statements remain accurate, the expense line items recorded are certified to be correct, and their recommendations do not in any way impact their opinion on the financial statements.”

Pristyn Care raised $177 million over five funding rounds, including the latest in December 2021, when it was valued at $1.4 billion. Its investors include Peak XV Partners (previously Sequoia Capital India and Southeast Asia), Tiger Global, Winter Capital, Epiq Capital, Hummingbird Ventures and Trifecta Capital. It leases hospital infrastructure, but the startup brings in its own doctors, medical equipment and medical consumables.

Internal controls ensure the orderly and efficient conduct of business, including adherence to company policies, safeguarding of assets, prevention and detection of frauds and errors, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial information, a senior audit expert at a large audit firm said on condition of anonymity.

“In short, (it is) the pulse of an entity. When any of these don’t work as they are intended to, a modification is made to the internal controls report. From this, it is abundantly clear that modifications to internal controls’ opinion are extremely critical in the overall context of an audit report and a very critical input into a decision that the user of a financial statement would make. A poor internal controls environment speaks volumes of the tone at the top,” the auditor said.

“In my opinion, material weaknesses in the internal control system raise a serious deficiency with respect to recording of revenues and expenses in books of account, particularly in view of the determination of accurate prices and non-genuine agreements,” said Vijay Kapur, a former director of the Institute of Chartered Accountants of India (Icai) and secretary of Icai’s Auditing and Assurance Standards Board.” It is quite likely that verification of sample items of revenue and expenses were found to be accurate, but in view of weaknesses, there may be manipulation to paint a rosy picture of the entity.”

“Further, in my opinion, the red flag raised by auditors is quite serious and significant to authenticate the books of account—an excellent window for auditors in future questions,” Kapur added.

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Updated: 05 Nov 2023, 11:45 PM IST