Statutory auditors of Imagine Marketing (Boat) have reported multiple compliance issues in the company’s updated draft red herring prospectus (DRHP). These observations relate to mismatches in lender filings, utilization of funds, unreported related-party transactions, and remuneration breaches.

For clients, this case highlights critical governance areas regulators and auditors are increasingly scrutinising.

1. Mismatch Between Lender Statements and Books of Account

Auditors noted that quarterly returns filed with banks did not match the company’s own books for FY23–FY25.

Our Perspective

• Banks rely on borrower submissions for drawing power, working capital limits, and covenant monitoring.
  
• Any mismatch—whether due to timing issues, classification errors or manual reporting—creates red flags for both auditors and lenders.
  
• Under SA 580 and SA 315, auditors must assess such mismatches as potential weaknesses in internal financial controls (IFC).
  

Clients should ensure:

• Monthly/quarterly lender submissions are system-generated.
  
• A reconciliation mechanism exists between ERP data and lender returns.
  
• CFO sign-offs are backed by documented workings.
  

2. Funds Raised for Short-Term Purposes Used for Long-Term Deployment

Auditors reported that short-term funds were used for long-term purposes in one subsidiary in FY23 and FY24.

Our Perspective

• This violates the Companies Act, Schedule III disclosures, and may breach loan covenants.
  
• Short-term vs long-term fund classification affects liquidity ratios and going-concern assessment.
  
• During IPO review, regulators look for consistency between cash-flow usage, disclosures and board approvals.
  

Clients should:

• Track source and application of funds using a formal treasury policy.
  
• Document board approval for any deviations and ensure disclosure in the notes to accounts.
  
• Conduct periodic internal audits of fund flow.
  

3. Unreported Overseas Transactions

The auditors noted that transactions for the Singapore subsidiary (Kaha Pte Ltd) were not reported when routed through another group entity.

Our Perspective

• This raises related-party compliance issues under:
  
  • Companies Act, 2013 (Sections 177/188),
    
  • Income-tax transfer pricing rules,
    
  • FEMA & ODI reporting.
    
• Non-reporting may attract penalties, require restated numbers, and affect valuation during IPO.
  

Clients should:

• Maintain a group-wide RPT register.
  
• Reconcile all cross-border payments with FEMA/ODI filings.
  
• Ensure audit committees review RPTs quarterly.
  

4. Excess Remuneration Paid to Directors

The company paid remuneration above the statutory limit in FY23. A shareholder resolution was later passed to regularise it.

Our Perspective

• Companies Act Sections 196–197 strictly govern director pay.
  
• Excess remuneration without prior approval can make directors personally liable.
  
• Regularisation through shareholder approval is allowed but must be disclosed transparently.
  

Clients should:

• Check annual limits before processing director payouts.
  
• Obtain NRC and shareholder approvals in advance.
  
• Maintain remuneration benchmarking records for audit readiness.
  

5. High Attrition and Leadership Changes

Boat reported rising attrition (34% in FY25) and leadership restructuring.

Our Perspective

• High attrition affects internal control reliability.
  
• Frequent leadership changes may necessitate additional disclosures during IPOs relating to management continuity and risk factors.
  
• For auditors, a weak control environment increases the risk of misstatements.
  

6. Company Response and Rectifications

Boat has stated that it has:

• Filed corrected financial statements.
  
• Obtained shareholder waiver for excess remuneration.
  
• Standardised financial reporting to reduce mismatches going forward.
  

This shows that early remediation helps reduce IPO risks but does not eliminate the need for strong governance frameworks.

Key Takeaways for Clients

1. Lender reporting must reconcile perfectly with books.

Even minor differences invite audit observations and impact bank relationships.

2. Maintain strict discipline over fund utilisation.

Mismatch between short-term funding and long-term deployment is a classic audit and regulatory trigger.

3. Related-party transactions must be fully documented and reported.

Particularly when subsidiaries operate overseas.

4. Director remuneration must follow Companies Act limits.

Regularisation later is possible but risky and reputationally expensive.

5. Strengthen internal controls before fundraising or IPO plans.

Auditors increasingly disclose control weaknesses in DRHPs.