Auditor raises serious concerns about Nawaloka Hospitals annual accounts

• KPMG Sri Lanka refuses to issue an opinion due to lack of audit evidence to support accounting record

KPMG Sri Lanka has refused to provide an opinion on the annual financial statements of Nawaloka Hospitals PLC due to the latter’s failure to account for billions worth of revenues, receivables and payables among other discrepancies.
Issuing the independent auditor’s report on the group’s financial statements for the year ended March 31, 2022, KPMG Sri Lanka, which acted as the external auditor for Nawaloka Hospitals, pointed at a number of issues which made the company’s reported figures opaque.

KPMG said it prevented them from arriving at an opinion on whether the company’s published financial statements offered a true and a fair view.  As a result, KPMG issued a ‘disclaimer opinion’ on the financial statements of the company, a rare instance where the auditor withholds from issuing an opinion on the financial statements when it could not obtain sufficient and appropriate audit evidence for them to base an opinion. 
Among the leading issues in Nawaloka Hospital’s annual financial statements was the absence or the inability of the company’s officials to provide the auditors with the necessary supporting documents to account for several billions of rupees of revenue. 

KPMG said the company had been unable to provide them with the detailed schedules nor supporting documents related to Rs.3.4 billion worth of revenue from laboratory services and Rs.1.03 billion worth of revenue from outward patients department services. 
Besides, they have also been unable to obtain sufficient and appropriate documentation relating to a group level revenue of Rs.3.2 billion relating to the subsidiary, Nawaloka Green Cross Laboratories (Pvt) Limited.

Further, the auditors have also been unable to find audit evidence to support Rs.2.3 billion worth of trade receivables and the impairment provisions of Rs.891.9 million made against the receivables balance. 
The company has also not been able to account for with necessary evidence for Rs.138.4 million related to prepayments and import controls, recognised as part of other receivables.  The auditors have also been unable to obtain external confirmation to ascertain the veracity of Rs. 961.2 million of trade payables and thereby to evaluate if it requires any adjustments elsewhere in the accounts. The audit has also identified that this payable amount includes balances for which settlements had already been made.

Referring to these and other discrepancies found in the books of accounts of Nawaloka Hospitals, KPMG in their disclaimer opinion said that as they were unable ascertain the accuracy of the profits, assets, liabilities, therefore they, “are unable to determine whether the Group will continue as a going concern”.  The Nawaloka Hospitals group swung to a net loss of Rs.96.6 million in the financial year ended in March 31, 2022 from a profit of Rs.501.3 million although the healthcare sector overall did extremely well with its competitors reporting consistently higher financial performances. 

If there was a single sector which was mostly insulted from the pandemic induced economic downturn during the last two years, that was healthcare. In fact, the pandemic generated more revenues to hospitals as they made makeshift testing facilities and opened new wards for COVID patients.
The hospital sector has been thriving this year even amid the worst of the economic crisis, delivering consistently robust financial performance.  However, Nawaloka Hospitals continued to accumulate losses as they reported a net loss of Rs.323.1 million in the six months through September 2022, compared to a net profit of Rs.777.2 million in the corresponding period last year. 

The company was last week transferred to the Watch List of the Colombo Stock Exchange (CSE), where companies which fail to comply with the listing rules are listed until they meet such requirements. 
Among the other issues raised by the auditor were that they have been denied with the supporting evidence to verify the valuation of the company’s year-end inventory and also to reconcile the physical inventory with the inventory ledger. 
By the end of March 31, 2022 the group had an inventory valued at Rs.544.9 million and Rs.748.9 million by September end.