Component 1

Class Assignment
Role of BRS Neupane & Co. in Scam Detection of
Jet Airways

Batch: 2019-22

Submitted To: Mrs. Soma Kulshrestha

Submitted by:
Chehak Rajgarhia (3172)
Avi Narayan Singh (3252)
Ishan Khatri (3263)
Saketh Vithal Chinta (3289)
Siddhi Kabra (3299)
Vaibhav Periwal (3305)

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Contents
ABOUT THE COMPANY ........................................................................................................ 3
INTRODUCTION TO AUDIT FIRM ....................................................................................... 3
HOW IT ALL STARTED... ...................................................................................................... 4
ANALYSIS ................................................................................................................................ 4
AUTHOURS’ OPINION AND CONCLUSION....................................................................... 7
REFERENCES .......................................................................................................................... 8

List of Figures
Figure 1. Airways Market Share ................................................................................................ 5

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ABOUT THE COMPANY
Jet Airways (India) Ltd is an Indian international airline based in Mumbai. It was one of the
largest airlines in India, with a total of 21.2% passenger market share as on February 2016. It
operated more than 300 flights daily to about 74 destinations all over the world. Its main hub
was Airport and also had secondary hubs at Indira Gandhi International Airport, Netaji Subhas
Chandra Bose International Airport and Chennai International Airport. The company was
incorporated as a limited liability company in 1992 and started operating completely from
1995. From 2004 onwards it started operating international flights also. The company became
public in 2005 and obtained Air Sahara in 2007. As the competition increased and its
competitors like SpiceJet and Indigo started providing cheap tickets, it was also forced to lower
its price. In October 2017, it came second after Indigo and had a passenger market share of
17.8%. By 2018, Jet Airways had a negative financial outlook due to the drastic increase in the
loss. The downward slide continued and resulted in bankruptcy in 2019 and Mr. Naresh Goyal,
the founding chairman of the company stepped down from the board of directors. It ceased
operations on 17th April 2019 but it is slated to restart its operations in Summer 2021.
Following this, on 22 June 2021, the NCLT approved the resolution put forward by Kalrock-
Jalan consortium. In an oral order, the NCLT has given 90 days to the Ministry of Civil
Aviation and the Directorate General of Civil Aviation for allotting airport slots to Jet Airways.

INTRODUCTION TO AUDIT FIRM

BRS & Co., Nepal's first partnership firm of accounting and consulting, was founded in 1988
and later merged with Neupane & Co., another leading professional accounting business in
Nepal (founded in 1985). This endeavour succeeded in the formation of BRS Neupane & Co.,
one of Nepal's leading accounting and consulting firms, which provides accounting, auditing,
taxes, corporate advice, management consulting, and other connected services.

According to the latest International Accounting Bulletin (IAB) World Survey, BRS Neupane,
a member firm of Nexia International (Nexia), a network of independent accounting and
consulting firms, has climbed one place from last year to become the ninth largest global
accounting network, as measured by fee income and consulting firms. BRS Neupane and Nexia
International have ongoing professional interactions, exchange of ideas, technology transfer,
and training & development programmes. BRS Neupane has access to Nexia's many resources,
allowing it to call on Nexia's professional competence as needed. Since 1989, BRS has

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collaborated on various donor-funded projects with Deloitte, Price Waterhouse India and
Australia, KPMG, ISO Partners, and ISC Hong Kong.

HOW IT ALL STARTED...

In the first quarter of FY 2017-2018 the revenue of Jet Airways increased by 5%. Hence, the
company decided to increase its capacity by 9%. The capacity of airlines is measured using a
metric called Available Seat Kilometres. While capacity and revenue for the company has in
fact increased, its Revenue per Available Seat Kilometre (RASK) had gone down (~4%) when
compared to the 1st quarter. This was because fewer people were flying Jet Airways and those
who were also paid less. This was mainly due to a decrease in the prices of tickets in the market.
As the company was making a loss on every available seat kilometre, the wisest decision was
to stop adding more and more capacity and focus on reducing the losses. However, Jet did the
complete opposite. It continued to expand its fleet size. Hence, the losses also increased. The
board committed to reduce the non-fuel CASK (cost per available seat kilometres) by 12-15
percent but was not able to do so. The company was only able to reduce their non-fuel CASK
by 1.5% after 5 quarters.

ANALYSIS
In August 2018, Naresh Goyal, the promoter of Jet Airways, is on his way to the corporate
office at Mumbai to attend an important meeting scheduled with the senior management team.
Jet Airways, then the second largest domestic airline by market share in India (27%), was
facing a serious cash-crunch as a result of:

• Acquiring Sahara Airlines (at a cost of 1450 crores)

• New airplanes on leverage and,
• The financial crisis of 2008 and regulatory probe over alleged lapses in timely
disclosure of default risk of loans worth rupees 11,000 crore.

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 Figure 1. Airways Market Share

Naresh Goyal had to work with the senior management team to evaluate various funding
options to meet liquidity requirements on priority. The management had to arrange for
financing options to get over the liquidity crisis and allay any uncertainty over the company’s
ability to service future debt repayment.

Jet Airways, in a bid to improve operational efficiency to service debts improved its capacity,
kept adding more seats and flying to more destinations. However, at the same time Jet had to
spend more on fuel, maintenance and salaries. Jet also had to ensure that it filled airplanes with
paying customers. Otherwise, the capacity becomes meaningless and it would have continued
to bleed money.

In a nutshell, fewer people were flying Jet and those that do, were paying less every time they
board a Jet. Add to this the fact that the aviation sector itself was stressed facing a double
whammy of increase in crude oil prices and a falling rupee in the highly competitive industry.
The weakening of the dollar-rupee ratio, around 16% rise in Brent crude rates because of rise
in fuel costs and the industry’s inability to pass on increased costs to the customer with a

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proportionate increase in ticket fares was responsible for the poor financial performance of the
company in FY 2017-2018.

These events (from Q3 of 2018) showed that a material uncertainty existed that may cause
significant uncertainty on the company's potential to operate as a going concern. The principle
of going concern implies that there is no threat of liquidation for the company in the foreseeable
future, which is usually perceived as a period of time lasting for twelve months. Also, as per
IndAS 1, management should consider initiatives planned by the company or its ability to raise
requisite finance in future to meet its obligations, over a period of 12 months or one year from
the end of accounting reporting period.

Jet posted a momentous loss of 1036 Crores in the last quarter of Fiscal 2018.

Despite this, the Auditor’s Report for FY2018 highlighted -

“The Company has incurred a loss during the year and has negative net worth as at 31 March
2018 that may create uncertainties. However, various initiatives undertaken by the Company
in relation to saving cost, optimize revenue management opportunities and enhance ancillary
revenues is expected to result in improved operating performance. Further, the Company's
continued thrust to improve operational efficiency and initiatives to raise funds are expected to
result in sustainable cash flows addressing any uncertainties. Accordingly, the financial
statements continue to be prepared on a going concern basis, which contemplates realization
of assets and settlement of liabilities in the normal course of business including financial
support to its subsidiaries”

Despite Jet’s inconsistencies to continue as a going concern, the auditors (BSR & Co and DTS
& Associates) believed in Jet Airways capacity to generate cash. The auditor green-signalled
the preparation of financial statements for continued to be prepared on a going concern basis
for upcoming quarters, which contemplates realization of assets and settlement of liabilities in
the normal course of business believing in Jet’s capacities to improve its operations.

As per the Standard on Auditing 570(SA 570), “under the going concern basis of accounting,
the financial statements are prepared on the assumption that the entity is a going concern and
will continue its operations for the foreseeable future. General purpose financial statements are
prepared using the going concern basis of accounting, unless management either intends to
liquidate the entity or to cease operations.

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Given the time pressure of issuing financial results, the management had to consider the various
ways through which the auditor's expectations could be resolved. The management needed to
make a specific assessment of the entity’s ability to continue as a going concern during
preparation of financial statements. Such assessment involves making a judgement regarding
the company’s capability based on factors like degree of uncertainty, subsequent events and
external factors.

The auditor changed colours within a quarter - the audit firm BSR & Co declined to sign the
airline’s first quarter earnings in FY 2018-2019 over differences with the management with
regard to the ability of Jet Airways to continue as a going concern. The main disagreement
between the management and the auditors only arose in Q1 of FY 2018-2019 was based around
the issues of negative net worth, high leverage and large repayment due in the subsequent
years.

These concerns were not raised during the year end audit and were highlighted only in Q1 of
FY 2018-2019. Auditor believed in Jet’s capacity to improve but threatened to resign when Jet
couldn’t deliver on the performance. While liquidity concerns were always a concern with Jet
after 2007 (owing to their acquisition of Sahara Airlines & 2008 financial crisis) the auditor
did not highlight adverse opinions and continued to believe in Jet’s ability to generate cash.

According to the forensic report being submitted after the bankruptcy of Jet Airways by SBI,
shows that the management was involved in siphoning of funds and creating excess provisions
for the loans given out to other entities such as a loan of 3353 crore given to Jet Lite over 4
years but the board approval for this was not made available to the auditors. Also, Jet Airways
had raised monthly invoices of around 15 crores for commercial activities but there are
documents available for this.

All these specifics show that the management was dubious and the auditors were complacent
enough to overlook this scam being committed.

AUTHOURS’ OPINION AND CONCLUSION

We believe that the company was in a dire situation even before FY18, as the cash generation
of Jet Airways had been negative for the year FY18 and the cash on the books of the airline
had fallen by 40% from 537 Crore to 320 Crore. Also, the near-term outlook for the industry
wasn’t very hopeful given the rising costs and slowing economy due to implementation of GST

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in 2017 and Demonetisation in 2016. It was evident that the airline would face a severe cash
crunch in the coming year as it had to generate free cash flow to fund its liabilities coming due
in next 12 months which amounted to 10,730 crores. However, the auditor reposed faith in the
management at the end of FY 18 and mentioned that the company has negative net worth but
still measures such as cost saving and optimising revenue along with fundraising initiatives
were taken into account without any concrete plan on the same.

This all showed the complacent behaviour of the auditor as his statement didn’t highlight the
risks the company might be facing. The auditor finally understood his complacency when the
airline posted a loss of 1323 crore in Q1 FY 18-19, as it was at that time, he declined to sign
the financial statements of the respective quarter and even threatened to give his resignation.
What followed next changed the Indian business landscape as Jet Airways posted a loss of
more than 5500 crore for FY 2018-2019 and finally was grounded on April 17th, 2019, when
it was unable to fulfil its liabilities.

If we would have been in the place of the auditor (BSR & Co.), we would have reported the
concerns early and would have suggested some cash guzzling areas where the company should
have managed its finances better such as forex and should have raised capital in the form of
equity instead of debt. An early indication of stress build-up along with falling cash reserves,
might have given the management ample time to alleviate these concerns and ultimately might
have saved the airline.

But the funds misappropriation and excess provisioning without proper documentation and
board approvals would be subject to reporting these matters to the Board of Directors, so that
the truth comes to light which would have saved the airline. If the Board of Directors are also
not keen on improving the financials of the company, resignation would be the only option left
which was what the auditors from BSR & Co. did during the Q1 FY 2018-2019.

REFERENCES
BUREAU, B. I. (2019, July 15). Jet Airways raised fraud bills, faked invoices and siphoned
off funds, says report. Retrieved from Business Insider India:
https://www.businessinsider.in/jet-airways-raised-fraud-bills-faked-invoices-and-
siphoned-off-funds-says-report/articleshow/70224604.cms
Business Standard. (2018). Retrieved from JET AIRWAYS (INDIA) LTD. (JETAIRWAYS)
- AUDITORS REPORT: https://www.business-standard.com/company/jet-airways-
5586/annual-report/auditors-report
Co., B. N. (2018). About Us. Retrieved from BRS Nupane & Co.:
http://brs.com.np/index.php/about-us/

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CORRESPONDENT, S. (2018, May 30). jet asked to explain fraudulent practices. Retrieved
from The Hindu: https://www.thehindu.com/business/jet-asked-to-explain-fraudulent-
practices/article24039741.ece
India, B. (2021). Retrieved from BSE India:
https://www.bseindia.com/corporates/comp_resultsnew.aspx
Mahanta, B. K. (2018, August 13). Economic Times. Retrieved from Jet auditor BSR may
quit if issues are not resolved:
https://economictimes.indiatimes.com/markets/stocks/news/jet-auditor-bsr-may-quit-
if-issues-are-not-resolved/articleshow/65381983.cms?from=mdr
Now, E. (2018, August 10). Economic Times . Retrieved from Jet Airways auditor finds
complete net worth erosion: https://m.economictimes.com/markets/stocks/news/jet-
airways-auditor-finds-airline-to-not-be-a-going-
concern/amp_articleshow/65357168.cms#aoh=16271252134961&amp_ct=16271252
33861&referrer=https%3A%2F%2Fwww.google.com&amp_tf=From%20%251%24s
Pawan. (2018). Finception. Retrieved from Jet Airways : How not to take on debt:
https://finception.in/stocks/jetairways/update/
PTI. (2018, August 21). Zee News. Retrieved from Now, govt knocks on Jet Airways auditors
door: https://www.zeebiz.com/companies/news-now-govt-knocks-on-jet-airways-
auditors-door-60369