Auditor Deloitte raises red flag over Fortis Healthcare's financial results

Delhi-headquartered hospital major Fortis Healthcare on Saturday released its audited results for the fourth quarter and financial year 2017-18, which were largely in line with the unaudited numbers announced last week. However, auditor Deloitte Haskins & Sells raised several red flags, including with regard to additional related party transactions. 

The Fortis board is expected to soon announce the potential investor — between Malaysia’s IHH Healthcare and the TPG-Manipal combine, which have placed binding bids to acquire a stake in the financial crisis-hit hospital chain. 

The board members met financial advisers and legal experts on Friday and held a night-long meeting that ended in the wee hours of Saturday. 

In an exchange filing, Fortis said there was no change in its audited financial results from the unaudited numbers reported on June 27, 2018. It added that the audited financial statement was released upon the completion of additional review of certain internal processes, which were undertaken at the request of the board of directors. “As expected, there has been no change in the figures reported in the audited financial statement compared to the unaudited result announced,” the company said in a statement. In the audited financial statement, Fortis has reported a loss of Rs  9.32 billion for the March quarter of 2017-18, owing to provisions, business challenges and impairments. The company’s loss has widened from Rs 680 million in the same period last fiscal. Revenues from operations stood at Rs 11.05 billion in the fourth quarter, down 4.7 per cent. 

For the full year, Fortis reported a loss of Rs 10.09 billion as against a profit of Rs 4.21 billion in 2016-17. Revenues declined marginally to Rs 45.73 billion. 

The company made provisions of Rs 5.8 billion during the fourth quarter, the recoverability of which is doubtful. This includes Rs 4.94 billion in loans that were granted amid systemic lapses and override of controls. These transactions have come under scrutiny of the markets regulator Securities and Exchange Board of India (Sebi) as well as the Serious Fraud Investigation Office (SFIO). 

Deloitte issued a ‘qualified opinion’ on the company’s financial results, saying it could not reach a conclusion because of the ongoing investigations into its finances. A qualified opinion is a statement issued after an audit is completed by a professional auditor, suggesting that the information provided is limited in scope.

The auditor also said the consolidated numbers could be impacted thanks to internal and external regulatory investigations. “We are unable to comment on the regulatory non-compliances, if any, and the adjustments or disclosures, which may become necessary as a result of further findings on the ongoing or future regulatory/internal investigations as the consequential impact, if any, on these consolidated annual results,” the auditor said in the statement. 

The Fortis board had commissioned law firm Luthra & Luthra to look into alleged financial irregularities and in its report in June, the firm identified several systemic lapses in the way loans were granted to outside parties. 

Deloitte also said it was unable to comment on the matter of Fortis brand ownership. It said the company had received claim notices from several parties (matter sub judice in a district court in Delhi), and that the company had claimed that it had not signed any term sheet with any party in relation to the Fortis, SRL and La Femme brands. 

In addition to the above matter, Fortis had also received four claim notices in May-June this year, totalling around Rs 2.5 billion, from entities that implied rights over the Fortis brand. The Fortis management has responded to these notices, denying any liability. 

“Since the matter is sub judice, the outcome of which is not determinable at this stage, we are unable to comment on the consequential impact,” the auditor added.

Commenting on related party transactions, the auditor also raised apprehension about additional related parties whose relationship may not have been disclosed to the company and hence not known to the management. 
 

Deloitte also expressed its inability to comment on the chances of getting a refund from former executive vice-chairman Malvinder Singh, who was appointed as lead, strategic initiatives, on termination of his ‘letter of appointment’. Fortis, meanwhile, said it was trying to recover Rs 200 million from Singh for breaching the limit of Section 197 of the Companies Act, 2013. This section prescribes the conditions for managerial remuneration in the case of absence or inadequacy of profit. 

Fortis Chairman Ravi Rajagopal said in a press statement, “Our focus in the future will be on strengthening governance and transparency and restoring the health of the business. We are also in the process of evaluating the bids received on July 3, 2018 and will present our recommendation to the shareholders in the coming days.” 

Deloitte noted that during the year, the group’s operations continued to generate positive cash flows from operations. Fortis is also looking to raise funds to tide through the financial crisis until it finds an investor. It has already secured a line of credit of around Rs 1.25 billion and is looking to raise another Rs 3.4 billion.

Health check on company

• Auditor Deloitte issues 'qualified opinion' on Fortis financial results
• Says it can't reach conclusion due to ongoing investigations
• Consolidated numbers may get impacted thanks to internal and external regulatory investigations
• Expresses inability to comment on 'consequential impact' of the controversy around brand ownership
• Raises apprehension about additional related parties whose relationship may not have been disclosed to the company