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Conducted financial due diligence on an NDT services company

Engagement: SKP was appointed by a European company to conduct financial due diligence on a target company into non-destructive testing (NDT) services for the oil and gas industry. The target company was based in Abu Dhabi and had presence in the Middle East and India. We performed the due diligence for the entire Group operations.

Findings

  • We performed adjustments to revenues for non-operating income concerning sales of assets, dividends received, interests, etc.
  • We found an increase in direct expenses as the company had booked the assets purchased as expenses, while they should have been capitalised.
  • The company had undervalued the inventory in earlier years. Hence, the necessary addition was made to represent the correct value of inventory for previous  years (FY 2009 and FY 2010)
  • We observed that fictitious purchase and expense bills were debited in the books with the sole objective of removing profits from the business. These were paid for in cash. (This was a management adjustment).
  • The cash flows to the firm did not show the true picture due to the lower inventory valuation in earlier years and cash withdrawals done by the management through fictitious purchase and expense bills.
  • The entity in India used to take loans and there were chances that the Indian tax authorities could treat this as income exposing the Indian entity to tax liabilities.

Value Delivered
The purchase consideration adjustments due to the above findings involved:

  • Adjustments to EBITDA
  • Adjustments to Net Working Capital
  • Adjustments to Net Debt