Audits are Getting More Attention Because of Financial Irregularities at New-Age Ventures According to a media report, some auditors recently presented to venture capital funds on how their earlier audits had discovered financial irregularities like inflated startup revenue.
Opinions expressed by Entrepreneur contributors are their own.
You're reading Entrepreneur India, an international franchise of Entrepreneur Media.
While corporate governance has been an ongoing issue over the past year, the most recent incident of the founders of Mojocare confessing to investors about exaggerating revenue has highlighted the necessity to closely monitor the activities of startups.
BharatPe, Byju's, Zilingo, Rahul Yadav's 4B Networks, and Trell are a few other startups with venture capital backing that have allegedly had governance issues in the last year. The aftermath of these events may have a significant impact on investors and the ecosystem as a whole, according to Ashish Bhatia, Founder and CEO of India Accelerator.
"First and foremost, it erodes investor faith in startups and heightens scepticism. As a result, throughout the due diligence process, the operations, finances, and compliance of the company may be looked at more closely. Second, incidents like this may push audits to be more prevalent in startups. VCs could demand stringent audits and more robust control methods to guarantee compliance and moral behaviour within organisations," Bhatia said.
He claimed that audits can be useful in spotting any red flags and ensuring that startups are abiding by the law and ethical standards. As per media reports, health and wellness startup Mojocare's major investors, Peak XV, B Capital, and Chiratae Ventures, have already engaged Deloitte to carry out a forensic audit, which has been ongoing for the past one to two months.
Frequent incidence of major corporate governance problems at Indian startups has also prompted some of the top consulting firms to approach venture investors about auditing their portfolio companies, an ET report said on Wednesday.
The report highlighted that some of the Big 4 firms have recently made presentations to venture capital investors outlining how their prior audits uncovered financial irregularities like exaggerated startup revenue.
To be clear, these talks and presentations do not imply that a fund is auditing every company in its portfolio. This highlights how everyone, including consulting firms and investors, is putting in more time and effort to make sure startups are operated according to the proper governance framework, the ET report, citing one source, said.
"As investors, we need to put due-diligence at the front and centre of our investment strategy. Every deal must be approved by the investment team with strong agreement, and this practice must be followed consistently. Before signing the term sheet, we need to make sure that the red flags are swiftly addressed," stated Ashish Kumar, Co-founder and General Partner of Fundamentum Partnership. He added that forensic due diligence may help us avoid the pain of forensic audits in the future.
According to DevX Venture Fund, they have always placed more emphasis on governance and audits in the startups, which are then followed by quarterly review calls with the startups. "Open-door policies also promote communication between entrepreneurs and investors outside of review meetings. This has helped firms cut their valuation requests and bring expectations back to reality, despite the cautious attitude and weakened investor confidence," said the Co-founder Umesh Uttamchandani.