Why didn't Air Deccan want E&Y on board?

Five months ago in December 2006, low-cost airline Air Deccan replaced its auditor E&Y, which had been in the job for barely a year. It happened at the Air Deccan annual general shareholder meeting, where one individual shareholder proposed a change in auditors. So, E&Y, one of the big five auditing firms in the world, was edged out by a relatively unknown chartered accountancy - BK Ramadhyani & Co.
It seems rather unusual for one shareholder to bring about a change as big as this.
Sources say Deccan and E&Y may have had some accounting differences. It may have been over a USD 100 million transaction that could have potentially hurt the profitability of the airline.
Last year Deccan created a Special Purpose Vehicle funded by international banks - Investec of UK and Nord Bank from Germany.
As per the deal, Air Deccan gave the SPV its aircraft purchase rights or the rights to buy 60 aircrafts from Airbus. In exchange, the SPV would give Air Deccan USD 100 million in four tranches over 15 months.
Air Deccan got the first tranche of USD 30 million between October and December last year. It chose to credit the money as income in the profit and loss account for that quarter. Sources say, that is where the disagreement started.
E&Y did not agree with the accounting treatment of that USD 30 million. The international auditor said to have pointed out to Air Deccan that the USD 30 million credit was not an income but only a financing arrangement. Eventually, Air Deccan would have to pay back the USD 100 million to the financier or the SPV.
But the objections did not quite work for Air Deccan, as a result of which, sources say, E&Y was reluctant to continue as auditor and the two parted ways.
22/05/07 Moneycontrol.com

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Categories: Air Deccan May 2007