Bartronics-the next Satyam?

In the latest available annual report of Bartronics(2009-10), there were some alarming points. That, coupled with the reputation of the stock as 'operator driven' should raise some concerns. The 09-10 report prompted me to see the 08-09 report as well. And this is what I found.

1. Chances of Fake transactions done electronically:-Fake invoices and confirmations were the Satyam scam modus operandi as well. Reading the audit qualification that such a big amount of sales/purchases could not be verified AND were outstanding at year end gives jitters. To quote the 09-10 audit report "The trading sales and purchases includes software transmitted through electronic form without adequate documentary evidence with respect to transfer of significant risks and rewards incidental to the ownership aggregating to Rs.8837.59 lakhs and Rs.8461.87 lakhs respectively.... and are outstanding..on which we are unable to express our opinion..". While the net impact is small vis-a-vis the profit of 6000+ lakhs, a fraud done interim 2010-11 would go undetected till Dec-11. Given that the profit is less than 75% of the suspect sales, chances of manipulation cannot be ruled out.
2. Wish to avoid statutory audit requirements:- When the foreign subsidiaries were initially set up, Bartronics did not appoint an auditor immediately but submitted unaudited subsidiary accounts in the 2008-09 annual report. The comment was " Since the management is seeking technical opinion on Audit Requirements in case of Bartronics America Inc. and Bartroncis Asia Pte. Ltd., in their
   respective countries of incorporation, their Audited Financial Accounts have not been attached". This is not illegal but reflects lowly on the corporate governance levels
3. Internal Audit inadequacies: They have used the same CA firm for 'perpetual' internal audit. Till 2008-09, there was no audit qualifications. But suddenly in 2009-10, where the firm size and scale had not materially changed, the same statutory auditor(Deloitte) suddenly found the internal audit inadequate. In their words "In our opinion the internal audit functions carried out during the year by a firm of Chartered Accountants appointed by the management which is not commensurate(emphasis added) with the size of the Company and the nature of its business". To censure another CA firm(and an old client) like this points to the fact that the Big 4 auditor is suddenly uncomfortable with the systems. 
4. Weak Internal Controls:- Deloitte again opened its account in 2009-10 by stating that "there is inadequate internal control system commensurate with the size of the Company and the nature of its business for the purchase of inventory and fixed assets and for the sale of goods and services, which needs further improvement and needs to strengthen systems and procedures relating to documentation.". Strangely, this point has not been given attention in the press. Considering that frauds on/by the company can occur via internal control weaknesses, this matter is significant in my view

         Considering that the share was dropped from F&O segment, there is no way to short it easily. Investors in this position should beware of 'surprises'. To be fair, the company claims in 09-10 annual report,  to be 'reviewing the system of controls...". But the question is-What was it doing all this while?Unless the company is more transparent with investors, quality risk prevails.