Pricewaterhouse raised issues with GoMechanic’s operations in its FY20 audit

Pricewaterhouse, the auditor of troubled car servicing startup GoMechanic in the financial year ended March 2020 (FY20), had flagged discrepancies in how the Sequoia Capital-backed startup had reported its business activities and assets, regulatory filings reviewed by ET showed.

Pricewaterhouse audited financial statements of GoMechanic only for the 2020 fiscal year, following which it was replaced by BSR & Co, an audit network member of KPMG, in FY21 and FY22.

The ‘qualified opinion’ by Pricewaterhouse have come to light a day after GoMechanic founder Amit Bhasin confessed on LinkedIn about inflating business numbers and getting ‘carried away’ while chasing growth.

Multiple people aware of the company’s accounting practices confirmed to ET about the ‘qualifications’ by Pricewaterhouse and said the company was told to fix those issues.

A senior executive at one of the ‘Big Four’ audit firms said qualifications are always a negative for a company and it means the company being audited hasn’t followed the requisite accounting practices and that the firm needs to fix it.

“Look, qualifications are negative in general. What matters after that is what the company does with that information flagged by the auditor. Sometimes, at an early-stage, investors feel founders will fix these processes over the long-term once they grow bigger,” the executive said.

Also read | How GoMechanic unravelled after SoftBank-Khazanah funding round collapsed

Matters listed under the Tiger Global-backed company’s FY20 audited financial report’s ‘qualified opinion’ included not holding that period’s annual general meeting within a stipulated period, not maintaining inventory records for receipts and issuance of goods directly received by customers, not maintaining formal documentation to map services rendered by the automobile workshops to end customers, among other non-compliances.

A qualified opinion, in accounting parlance, is a written statement by an auditor in an audit report that states that the financial statements of a client are fairly presented, except for specified issues.

“However, based on our audit procedures we did not have any concern regarding existence of the inventory and occurrence assertion for commission revenue,” according to the note. These filings were sourced through business intelligence patform Tofler.

Another source aware of the firm’s audit remarks said it had to work on these issues in its next year’s financial report.

"Inventory is important for revenue recognition. If they don't make correct inventory records, you cannot actually audit the right revenue. This means one is not bringing in a certain aspect of the revenue into their books, that is a material discrepancy," a chartered accountant from the automotive industry told ET.

“The new auditors were largely okay with it. You will not have seen many qualifications in FY21 and FY22. And yet here we are, and a new forensic inquiry is underway,” one of the persons said, adding that it had become increasingly important to spot such accounting practices at startups early on.

While filing its audited report with the Ministry of Corporate Affairs (MCA), the board of directors at Targetone Innovations, the parent unit of GoMechanic, said in a new report that “there were some documentations issues in inventory records that were observed during the audit, and the same has been rectified now,” without any substantiation on what went wrong or how and when it was rectified.

GoMechanic founders Bhasin, Kushal Karwa, Nitin Rana and Rishabh Karwa did not respond to ET’s emails till press time Thursday. Pricewaterhouse and Sequoia Capital India also did not respond to queries.

ET reported in the January 19 edition that an investment due diligence conducted by EY for Japan’s SoftBank and Malaysia’s sovereign fund Khazanah led to several questions being asked on company accounts which eventually led to the confession on Wednesday.

Evolving fast

Even as a forensic probe is pending on its founders, debt investors like Stride Ventures are starting to take a bigger role at the firm to recover debt.

“I think they (Stride) have some clauses that have kicked in now because of the current situation and debt payments being pending. They are trying to navigate the firm to some sort of stability along with equity investors,” a person briefed on the matter said.

Stride Ventures’ Ishpreet Singh Gandhi declined to comment on the ongoing deliberations at the firm.

Sources close to the firm reiterated on Thursday that the scale of misreporting of numbers at GoMechanic remains unclear. “They are waiting for the forensic report to come sooner than later,” this person added.

Sequoia Capital holds 27%, Tiger Global 10%, Orios Venture Partners has a 17% shareholding, while Chiratae Ventures has a 10% stake in GoMechanic.

The list of investors also includes Strides Ventures, which has disbursed debt to the troubled startup.

“The investors of GoMechanic were recently made aware by the company’s founders of the serious inaccuracies in the company’s financial reporting. We are deeply distressed by the fact that the founders knowingly misstated facts, including but not limited to the inflation of revenue, which the founders have acknowledged. All of this was kept from the investors. The investors have jointly appointed a third-party firm to investigate the matter in detail, and we will be working together to determine next steps for the company,” the company’s investors said in a joint statement on Wednesday.

Founded in 2016, GoMechanic has raised around $62 million in total since inception and was last valued at around $350 million when Tiger Global invested in 2021.

Sequoia Capital first invested in the firm in 2018 and got a board seat in September 2020.

A spokesperson for KPMG India told ET it cannot, as a policy, comment on any company specific matter.