Daybreak - Byju's auditor Deloitte says “I quit”

Episode Date: June 22, 2023

On Thursday evening news broke that Deloitte, the biggest audit firm in the world, has resigned as Byju's statutory auditor. This couldn't come at a worse time for the edtech giant. Just hours before this, three of its key board members also tendered their resignations over differences with the company's founder. It was in September last year when, after a long delay that raised many eyebrows, Byju’s had finally released its financials for the year 2021. The delay was because Deloitte was not satisfied with what Byju’s was presenting to them as a fair picture of their accounts. It gave it an "adverse opinion."Months have passed since and there is still no sign of Byju's financials for FY2022. Worst still, the company's own projection of a Rs 10,000 crore revenue for the same year seems to be incorrect.Tune in. Recommendations: The seven things you need to know about Byju’s FY21 financials WTFinancials is going on at Byju's? Byju’s is looking like a hedge fund  Indian lenders cut off Byju’s air supply by not lending to its usersDaybreak is produced from the newsroom of The Ken, India’s first subscriber-only business news platform. Subscribe for more exclusive, deeply-reported, and analytical business stories.

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me, my interruptions, my analogies, and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too. It's for a special announcement. For the last few months, I and Sita Ramon, Ganesh, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

We want to tell the secret sauce stories of India's greatest companies. Stories of how they were born, how they fought to survive, how they build their organizations and culture, how they manage to innovate and thrive over decades, and most importantly, how they're poised today. To do that, Sita and I have been reading books, poring over reports, going through financial statements, digging up archives, and talking to dozens of people. And if that wasn't enough, we also decided to throw in video into the mix. Yes, you heard that right. Intermission has also had to find its footing in the world of multi-camera shoots in professional studios, laborious editing, and extensive post-production.

Sita and I are still reeling from the intensity of our first studio recording. Intermission launches on March 23rd. To get an alert as soon as we release our first episode, please follow Intermission on Spotify and Apple Podcasts or subscribe to the Ken's YouTube channel. You can find all of the links at the ken.com slash I am. With that, back to your episode. In September last year, Bayju Ravindran, the Eddek Giants founder,

gave a tell-all kind of an interview to money control. In it, he talked about how the six months before the release of the infamous financials had been really tough on him and how he'd barely gotten any sleep the whole time. Nine months later now, it looks like Bayju Ravindran is going to lose more sleep. A lot more sleep, in fact. Because last evening, news broke that Deloitte, the biggest audit firm in the world, has resigned as the company's statutory auditor. Ravindran's interview had come right after the company's company had released its financials for the year 2021 after a long delay that had raised many eyebrows. The delay was because Deloitte was not satisfied with what Byju's was presenting to them

as a fair picture of their accounts. Now, at the time, the Atec giant was already in the news for all the wrong reasons. The delay in filing financials being the first one, of course. Somebody like Deloitte saying that your financials are complicated. and messy reflects really badly on any company. And then there was the other stuff too that was bringing in a lot of what we call quote unquote bad press. Questions were being raised about problematic sales practices.

Then there were the layoffs, of course, and also the funding troubles. Baiju was doing everything that it could to change the narrative. And one such thing that it did was to say that the company's revenues for the financial year 2022 would be 10,000 crore rupees. But nine months later, the Ken's sources, including the company's current and former employees and an ed tech investor, have pegged its revenue closer to 7,000 crore rupees. And the worst part is that there is still no sign of the company's financials for the year 2022. And this is exactly the reason that the audit giant Deloitte cited for quitting as the

company's auditor. Now, this could not come at a worst time for buying. Because just hours before this, three key board members also tendered their resignations. It was reported that it was because of differences with the founder Bayju Ravindran on key operational issues. And if you think this is all, hang on because there is more. Just yesterday, Arundhati Ramanathan, the Ken's deputy editor, wrote an exclusive report about how, since April this year, major NBFCs which lend to Bayju's customers to buy its ed tech products have suspended their loans. These are multi-year subscriptions of courses that we're talking about that run into lakhs of rupees. It is like getting one knockout punch after the other. Oh, and let us not forget

that Bayju's lenders also want a part of their loan money back. And one of the reasons for it is also that they have kind of lost their confidence in the company because of the delayed financials. Honestly, if I were byjuice, I would probably want to be in that lost submarine near the Titanic right now. But on a serious note, I thought this is the perfect time for me to take you back to this episode of daybreak from December because it will help you understand what led to this point where Deloitte has decided to wash its hands off by Jules. I had spoken about why Deloitte flagged by Jews financials for the year 2021 and how that had affected the company's creditors. Welcome to Daybreak, a business podcast from the Ken.

I'm your host, Nick Das Sharma, and I Don't Chase the News Cycle. Instead, thrice a week on Mondays, Wednesdays and Fridays, I will come to you with one business story that is worth understanding and worth your time. Today is Friday, the 23rd of June. 2021 should have ideally been a great year for Bayju's. It was a year when the pandemic had brought about a newfound appreciation for online learning. Bayju's raised $2.5 billion since the beginning of the pandemic. Its valuation rose from $8 billion to $22 billion.

In the short period between 2020 and 2021, Bayju's users almost doubled from 64 million, to 110 million. 2021 was a year when Bayju's made a dizzy number of acquisitions and garnered mind-boggling valuations. So when its auditor, Deloitte, took months to give Bayju's an approval for its financial year 2021 filings, many thought it could be because of a lack of audit bandwidth.

After all, the company had seen a five-time scale and size. And that is exactly what a company spokesperson also told the ken when in June we asked them about the delay in the filing. Unfortunately for Bayju's, that five times scale and size also indicated the size of its losses. It was 15 times. Turns out, the Deloitte auditors were not satisfied with what Bayju's was presenting to them as a fair picture of their accounts. The auditors gave an adverse opinion on Bayju's financial statements for the financial year 2021. This basically meant that Deloitte had sufficient evidence to conclude that Bayju's financial statements contained material misstatements and did not represent its financial position fairly.

The same month in June, the Ken was the first report that Deloitte had held off from a proving Bai Jiu's financial statements over its revenue recognition practices. Now, one of the most notable changes in Bayju's financials for the year that ended in March 2021 is to do with how it books its revenue. EduTech products, mainly tablets and memory cards, accounted for more than 80% of Baiju's revenue in this period. And as in the previous year, it recorded the entire sale value of these products when the customer bought them. But it took a different approach for the revenue that it got from the streaming of

educational content. Whatever a learner was charged for the content, it would now be booked through the period that they availed of it. For example, if the learner paid, say, $10,000 for Baiju's content over two years, it would be divided equally between the two years instead of being captured entirely in the first year's financial. Apart from that, in its report, Deloitte also pointed out problems related to determination of financial guarantees given on behalf of customers.

Also, it noted improper estimation of sales returns and expected credit loss. And also, the absence of an accounting manual. Plus, there was White Hat Jr., the four-year-old coding for kids' startup that Bayju's had acquired in 2020 for $300 million. The acquisition is gradually turning out to be quite a burden for byju's. From the time it was acquired, White Hat Jr. pulled in 327 crore rupees in revenue. But its losses were five times that amount. It contributed to around one third of Bijou's consolidated losses in the year that ended in March

2021. One likely reason is its high customer acquisition costs. The Ken had earlier reported that White Hat Jr. was spending as much as $2,000 to acquire a customer in the US, which is Bayju's second largest market. The auditors also highlighted that the company had a lack of personnel with adequate experience and required competence in financial reporting and internal control. So no thanks to these auditing changes, the $22 billion ed tech company saw its revenue grow only by 4%.

Apart from the standard audit fee, Bayju's also had to pay $3.5 crore to Deloitte. This was an account of the additional effort incurred in the audit consequent to material weaknesses observed in internal controls. So now you're getting a sense of why Bayju's lenders saw their confidence in the company dropped to a new law. Clearly, they were not happy with Bayju's audit report. The report showed them how Bayju's overestimated its revenue, how the company had weak internal financial control, and how they had not hired the right people to handle their accounts.

While the exact details are not disclosed to the public, it was reported. that the company failed to file its annual statements for the financial year 2022 and couldn't get credit ratings for the $1.2 billion loan within the duration of nine months. It all started in November 2021 when the company was looking to raise $500 million via an institutional term loan. But it ended up raising $1.2 billion, which was touted as one of the last largest unrated term loans by a startup ever. Now, one detail that we need to understand about such loans is that they can be traded,

which means lending can actually be securitized. The lender can turn the loan that it's given into an asset for itself. For example, if you lend me 100 rupees, I am an asset worth 100 rupees to you. You can trade this loan with someone. You can go to someone and say, give me 80 rupees now and you can take back 100 rupees from Snigda. And this is exactly what Bayju's original lenders did. They passed on the loan to a third party. Now this third party is the one who is negotiating the terms of the loan with Bayju's

and is holding Bayju's accountable for breaching the terms of the loan. Bayju's in turn is asking for renegotiating the terms of the loan because interest rates have gone up significantly. But lenders are pointing towards Bayju's failure to keep up with the original terms of the loan in the first place. Now, the new lenders want Bayju's to pay a part of the loan in order for them to renegotiate the terms to suit Bayju's. To sum it all up, Bayju's has made multiple stakeholders very unhappy, from its customers and auditors to its lenders. No matter how successful a business becomes, it does need to be mindful of the value that it is creating for all its stakeholders.

Before I sign off, I would like to tell you that the Ken has been covering byju's extensively. So I'm going to add links to all the relevant articles and podcasts that we have done so far so you can understand what is happening to the attack giant in even more detail. Daybreak is produced from the news news news. of the Ken, India's first subscriber-focused news platform. What you're listening to is just a small sample of our subscriber-only offerings. A full subscription unlocks daily long-form feature stories, newsletters, subscriber-only apps and podcast extras.

Head to the ken.com and click on the red subscribe button on the top of the website. It is t-he-he-k-en.com. I am Snegda Sharma, your host, and today's episode was edited by my colleague Rajiv Sien.