Auditors of Rajesh Exports Criticised for Overlooking Discrepancies in Financial Reporting

Financial Misreporting Scandal Rocks Rajesh Exports

The Bengaluru-based Rajesh Exports has been embroiled in a financial misreporting scandal, with allegations of a staggering Rs 15 lakh crore in misreported revenues. At the heart of the controversy are the company's statutory auditors, PV Ramana Reddy & Co and BSD & Co, who seemingly failed to detect and flag dozens of questionable transactions.

Between FY21 and FY24, the auditors allegedly turned a blind eye to related-party transactions, the pumping up of domestic revenues, and the misreporting of trade payables. This allowed the alleged financial misreporting to go on for five years, causing losses to 2 lakh small investors holding shares of Rajesh Exports.

The Securities and Exchange Board of India (Sebi) has taken notice of the scandal, passing an ex parte interim order on June 3 barring Rajesh Exports chairman and managing director Rajesh Mehta from dealing in securities markets. The order also requires the company to rectify the incorrect filings and cooperate with the investigation.

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Auditor Non-Cooperation Raises Red Flags

Sebi's order also highlights the non-cooperation of the auditors, who were asked to provide various audit papers but failed to comply. "REL's Statutory Auditors, despite undertaking to furnish audit working papers during their depositions, have also not complied. This sustained non-cooperation is itself indicative of an intent to suppress material information and obstruct regulatory inquiry," Sebi said.

A company's auditors are liable in case of any audit lapses, a responsibility which is significantly more serious in case of listed firms. In the past, Sebi has issued orders against some of the large audit firms for failing to ensure accurate documentation.

Key Misses by Rajesh Exports' Auditors

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A significant portion of the alleged Rs 15 lakh crore misreported revenues was generated by the foreign subsidiaries of Rajesh Exports. However, these statements are not audited by Indian auditors but by designated professionals in the country where the company is incorporated.

The Sebi order also pointed to several domestic transactions that violated rules but were neither detected nor flagged by the auditor. For instance, standalone revenues of Rs 12,500 crore, representing 64 percent of the company's total standalone revenue between FY21 and FY24, were misrepresented.

Mehta's Gold Derivative Trades Raise Suspicions

Rajesh Mehta executed gold derivative trades in his personal capacity, selling Rs 11,487 crore worth of such contracts and purchasing Rs 11,488 crore through a Sebi registered broker Affluence. These were reported as transactions carried out by the company.

The auditor also allowed reduction in long outstanding receivables worth Rs 2,914 crore through opaque netting arrangements without adequate disclosures explaining the nature and basis of such adjustments.

Audit Failures Highlighted by Sebi

The auditors failed to present a true and fair view of the company's financial position by incorrectly including intra-group investments worth Rs 2,501 crore (as on March 31, 2025) and intra-group trade payables worth Rs 1,457 crore (as on March 31, 2025) and Rs 1,379 crore (as on March 31, 2024) in consolidated statements.

The auditors' failure to flag these errors raises serious questions about their competence and independence.