Nawaloka Hospitals initiates remedial actions on serious accounting lapses

• Says remedial measures would help to move past these issues in 2023 

In response to the disclaimer of opinion issued by the external auditors on the financial statements of Nawaloka Hospitals PLC for the financial year ended on March 31, 2022, the company this week said it is taking remedial actions to address each one of the issues raised by the auditors, as required under the listing rules of the Colombo Stock Exchange. 

In early December, KPMG Sri Lanka issued a disclaimer of opinion on the annual financial statements of Nawaloka Hospitals PLC, a rare instance where the auditor refuses to comment whether the accounts give a true and a fair view, due to the absence of evidence to support that view. 

KPMG Sri Lanka in its independent auditor’s report identified a number of discrepancies in the accounts for the financial year ended on March 31, 2022, where the company had failed to provide sufficient evidence to account for billions worth of revenues, receivables and payables among others.

KPMG said it was not provided with either the detailed schedules or supporting documents on Rs.3.43 billion worth of revenues identified coming from laboratory services and another Rs.1.03 billion recognised to have come from outward patient department services. 

Further, the auditors said they could not obtain sufficient appropriate documents related to a group revenue of Rs.3.17 billion relating to a subsidiary, Nawaloka Green Cross Laboratories (Private) Limited.  

Nawaloka Hospitals in a stock exchange disclosure this week said the management had taken the necessary arrangements in preparing schedules/reconciliations required in support of the revenue and would restate the accounts where applicable in complying with the accounting standards. 

However, the removal of this qualification on the revenue would be subject to the auditor’s verification, the company added.  In a further matter relating to the company’s failure to provide with supporting documents for the physical verification of the inventory and the valuation of the inventory, the company said the management expects to carry out a verification of total inventories as at December 31, 2022, in the presence of auditors, prepare related count sheets and reconcile the physical quantity with the inventory valuation report, sub ledgers and supporting documents related to purchase of the inventory. 

Hence, the company doesn’t expect this issue to reappear in 2023.   With respect to the trade receivables, impairments, prepayments and import control and trade payables, where there wasn’t satisfactory audit evidence, the company said it had commenced preparing reconciliations between general ledger versus sub ledger and collate all appropriate and relevant supporting documents to verify the existence, completeness and accuracy of the balances under each account title. 

As a result of this string of issues in the accounts, which are material in size, KPMG Sri Lanka said it was unable to assess the accuracy of the reported profits, tax expense, total assets and total liabilities of the company and thereby it withheld from commenting if the company could continue as a going concern. 

In response the company said, “The management is in the process of preparing a detailed assessment report of the appropriateness of using the going concern assumption in the preparation of financial statements by the group. As a result, the management does not expect that this qualification would be repeated in 2023.”  Nawaloka Hospitals came to the spotlight in recent times, due to its repeated quarterly losses, while the overall healthcare sector reported profits. The Nawaloka Hospitals group swung to a net loss of Rs.96.6 million in the financial year ended on March 31, 2022, from a profit of Rs.501.3 million a year ago.

Few weeks ago, the company was also transferred to the Watch List of the Colombo Stock Exchange, a place where the entities that fail to continuously comply with the ongoing listing rules are listed until such companies meet the requirements.