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While the USA is recovering from the experience of Enron, it seems Nepal is still to learn the lessons from this experience referred to as one of the greatest corporate scandals of the world. We take this time the cases of three Nepali corporates in search of signals akin to Enron. The result of the probe is that the Nepali corporate world is a really an enigma for ordinary mortals to understand. Though the companies are indeed suffering from problems that would in other countries, either lead to their immediate liquidation or criminal actions against the people in their management, and almost everyone who has any knowledge about the principles of corporate management knows clearly that the condition in them is getting to alarming proportions, nobody in the authority is paying any heed to the situation.

Take the example of Necon Air Ltd. This is not only the oldest surviving private sector airline of the country, it is also the only airline company listed in the stock exchange and was doing quite well till four years ago. Its shares with a face value of Rs. 100 were selling at around Rs. 400 in 1999. But now, the stock exchange quotes show them valued at lower than Rs. 30.

Almost similar case is presented by Salt Trading Corporation Ltd. (STCL). Listed in the stock exchange, this company was once the epitome of efficiency in comparison to the fully government-owned corporations of the then era. It still projects itself as a highly efficient company in its reports to the shareholders. But the analysis presented later in this section about the financial condition of the company on the basis of the latest audited financial reports available for the public, shows that it is technically insolvent. Though the shareholders are given handsome dividend, the motivation of the directors in proposing high dividend to the shareholders seems to be very shortsighted. If Enron's fault was overstating the profits, that is the fault STCL has been committing.

Then there is Oriental Hotels Ltd., the company that owns the property which is operating under the Radisson brand as a hotel. The company had trouble listing its scrips on the stock exchange last year after the money was collected from the general public. The reason was the lie detected in its declarations made to the public before issuing the shares. The latest financial statements of the company show that the company is still practicing lie in its declarations/disclosures. Most importantly, though the company's auditor submitted his report to the board of the company in September 2002 after auditing the books for the year ended on mid-July 2002, the board has not called for the Annual General Meeting of its shareholders. The report is presented to the stock exchange, but only those shareholders have got it who have good connection to get it from the stock exchange. Though the hotel is considered quite successful in attracting local business such as meetings, conventions and banquets, it is credited singly to the public relations of the Managing Director, BK Shrestha not to the effort of the management.

What is common among these three cases? Perhaps, the professional dishonesty encouraged in most instance by some greedy promoters who control the management of the company and who are supported by other equally greedy or timid directors. The comments that we have presented in the following pages about the financial reports of these three companies show that the lies visible are such that cannot go unnoticed by the directors of the company.

The directors from the general public seem to have proven ineffective. Some general shareholders also complain that their representatives have in fact teamed up with those promoters who have control on the company and are misusing their authority. Those public representatives who try to correct the things get shunted out cleverly by the shrewd promoters. Some of the directors in some companies representing the general shareholders are in fact members of the team of the promoters who control the management.

How do the controlling shareholders go on bleeding the company? The best example is provided perhaps by Necon Air Ltd.

Some people argue that the Necon Air's present plight is due to the departure of late Anoop SJB Rana from the company. The directors of the company led by incumbent Chairman and Managing Director Deep Mani Rajbhandari could not continue to lead the company along the route that was charted by Rana. Others attribute the failure of the company to the unfortunate crash that the company's Avro craft faced three years ago thus reducing the customer confidence on the airline.

When we contacted the existing and the former directors of the company (Rajbhandari himself was not available despite several attempts), they were found to have high confidence on Rajbhandari, who was a pilot in RNAC before he opened Necon with investment from his friends (including Rana who was a former executive chairman of RNAC). This over-confidence on Rajbhandari explains why he is allowed to try with different, sometimes queer, experiments in airline management.

One such experiment was the tie up with Shangri-La Air and induction of Karnali Air's owner Narayan Singh Pun in the promoter's group of Necon offering him the Executive Chairman's position. Pun left the company within a couple of months thus sending further bad signals to the already frustrated general shareholders and the market at large. Further damage was done by the subsequent change in the Chairman's position. Rajbhandari took the reigns himself after Pun left. But soon he put Mukund Bhakta Shrestha at the seat for a couple of months, but again removed him to place himself at the seat. That created a record in the history of Nepali corporate management, i.e. Necon is the only company with so many changes (4) in the board leadership within a year. What would be the employee moral in a company that sees so high a turnover in the board?

Despite the fact that he has pledged his two houses to get loan for the company and put his personal reputation at stake, Rajbhandari is not getting positive evaluation. The reason is in his style of management, say persons who know him closely. Compared to Anoop SJB Rana's, Rajbhandari's relations with the staff are not cordial. He does not put the required level of trust on his people and changes his decision very frequently making it difficult for the people to carry on with their jobs.

Despite being aware about these facts, the other members of the board of directors of Necon are not doing anything because they have no alternative. Their money is stuck already and they can only hope that Sane (as they refer to their friend Rajbhandari lovingly from his childhood name) will do something to pull the airline from the air pocket that it has presently caught up. Neither can the banks or the suppliers do anything. The series of events that negatively affected the tourism industry of the country over the last two years has provided a very good protection to the airline from banks, it seems. The banks that are in the consortium that has lent to Necon and the British supplier that has supplied the craft are stuck with the airline. They cannot press the company any further for their dues as the company simply cannot repay and it has the global recession in the airline and tourism industry as the pretexts to argue that the problems of the company are related to the macro situation, not to the management of the company.

So the banks have come to the consensus, it is reported (though the decision is not inked as of the time when this matter went to the press), that they will help Necon to open L/Cs for the aircraft it needs. According to the arrangement, the one unit of ATR craft that Necon is flying right now though failing to pay the installment due on account of the craft will be purchased by the supplier who will lease it to Necon so that the airline will be able to continue flying it. The banks will open a letter of credit in favour of the supplier-lessor with the condition that the banks will pay the lessor only in case the airline defaults on the rental payments. Since the plan offered by Necon to the banks says it needs to operate two ATRs and two Beech craft to become able to service its debt obligations, the banks are to open 60 months deferred payments L/C for one ATR and one Beech craft and 12 months deferred payment L/C for one Beech engine. (The Beech craft the airline had under arrangement with Shangri-La Air were taken back by the American supplier). But for the favour of the banks to materialize, the directors of Necon have to arrange about Rs. 40 million for working capital.

The pressure on the banks to accept the Necon proposal is evident. They are not taking any action to realize their dues despite clearly seeing that the financial projections submitted by the airline do not show the company's proposal as bankable. The projections show that even if the help sought by the company is provided by the bank, the company would be facing a cash deficit of Rs. 78 million in the first year, Rs. 66 million in the second year, Rs. 52 million in the third year and Rs. 17 million in the fourth year. The plan does not have anything to address this cash deficit. The long and short of this is that the company will have to continue defaulting on such payments as to the Civil Aviation Authority, the tax department, to the fuel supplier, to the electricity supplier and also the staff. Still the banks have no alternative except helping the airline

A study about the genesis of the problems in Necon yields some interesting learnings. The theory that Necon was efficient in the past and it lost that efficiency later, is denied by some Necon insiders. "It was successful in the beginning not because of its efficiency but because of the lack of efficiency in RNAC with which it was competing. That time anything that could come in the private sector would have done better than RNAC and prospered", says one airline operator. The point is driven home by the fact that as soon as new companies entered the market, Necon immediately started losing the market.

The failure of Necon then can be attributed to the wrong selection of technology. While it was flying Avro craft, the new companies - e.g. Buddha Air - came with Beech craft, which proved to be a much faster machine in term of technology giving higher speed and higher altitude (the latter feature giving the new entrant an enviable edge over Necon in the lucrative mountain flights).

It also means that despite being the undisputed leader of the initial period (Everest Air and Nepal Air that had started almost together with Necon had closed down leaving more space to Necon) Necon did not try to create entry barriers for the new companies. The management of the company was regarded to have good relations with the power centres of that time, but that resource was not utilized. This relationship could have been used to get the permission to increase the fares in time. But that did not happen. Rather, this relationship yielded negative returns to the company. The employee number was increased during that period succumbing to the political pressure, point out some Necon insiders. One such insider says the company never has had a strategic plan in its entire history. Everything has been running on day-to-day basis.

Some people say, late Anoop SJB Rana left the company over a dispute with other directors about the type of the craft that they thought would be best for the company. Later the company brought ATR as the directors other than Rana had intended from the very beginning. In fact it was a good decision as ATR is a far better technology craft than Avro, but the timing of the introduction of the new plane was wrong, opine the experts. April is not a right time for introducing new aircraft.

Regarding the banks' attitude, there are differences of opinion. Some observers say that it was the non-cooperation of the banks that can be attributed for many of the problems that the airline is facing. For example, had the banks provided the support that the airline was asking early this year, it could have already started showing some positive results as envisioned in the business plan. But some other observers say it is the reckless lending by the banks that encouraged the airline to go on with its faulty management system. The banks could have contributed to the management improvement by carefully adding some loan covenants.

Necon's plight thus can be attributed to the lack of management experience in Rajbhandari, who is a retired pilot from RNAC, i.e. without the management expertise required to manage such a big airline. But what about similar troubles brewing in STCL, where the people at the helm of affairs are well versed in the management science? Again, one factor blamed is the reckless lending from the banks. This year's figures in STCL's financial reports did not crop up suddenly only this year. They were there also last year and in the year before that (e.g. the reducing value of the investment in subsidiaries coupled with growing bad debts and lack of provisions for the gratuity to the employees). The banks did not care about it and added about Rs. 30 million to this company during the year.

What is the remedy? Perhaps none. The lawyers we contacted said that the law requires that anyone who wants to lodge any complaint against the company management for any wrongdoings, must have at least two percent of the company's stock or they should form a team so that the team will collectively own at least 5% of the shares. This is something like the proverbial Dharni (a weight of slightly over 2 kgs) of the frogs - you can never have enough of them to weigh a Dharni because when you are adding one to the scale some one will jump off the scale and reduce the weight.

Elsewhere in the world, the shareholders can also approach the regulator of the stock market of the country. But in Nepal's case, this route is blocked as the regulating authority Security Board (SEBO) complains that it is not empowered to take any action even in case of fraud from the company management against the general shareholders.

The Company Act 2053 has prescribed formats for presentation of the financial statements for all companies incorporated under the Act. NECON has not been following the prescribed format as its financial statements are not presented accordingly. Some of the major deviations are listed below:

The interest expenses and depreciation costs have not been disclosed in the face of the profit and loss account but included in the administrative expenses schedule.

The loss on sale of Cessna Aircraft has been reflected under the capital reserve. As per Company Act format, such loss should be disclosed in the profit and loss account.

Schedule 1: Share Capital discloses holding of shares by different categories of shareholders. This is not required as per the Company Act.

Schedule 3 & 4: Secured and Unsecured Loans - The prescribed format is not followed. The Company Act requires that loans be disclosed under short term and long term loans wherein the long term loans are disclosed in schedule 3 and short term loans under current liabilities. Further, NECON has not segregated the dues repayable within one year from the long term loans and disclosed under current liabilities.

Schedule 8: Sundry Debtors - No segregation of secured and unsecured debts made. Details of dues outstanding for more than six months and from related parties not disclosed. No provision for bad and doubtful debts disclosed.

Schedule 9: Cash and Bank balances - Disclosures not made between cash, bank and cash in transit. Details of bank accounts operated by the company listed which is not required. Provision for doubtful debts for loans, advances and deposits are not disclosed.

Schedule 10 - Loans and advances - LC and guarantee margin to be disclosed under this schedule is shown in a separate schedule.

Contingent Liabilities- Contingent liabilities are to be disclosed as a separate schedule, this has not been done.

Disclosures relating to the accounting treatment of the following has not been made in this schedule:

# Accounting policy for valuation of closing stock and that the stock is lower of cost or net realisable value.

# Accounting policy for recognition for bad and doubtful debts, loans and advances and other receivables.

# That the financial statements have been prepared in accordance with the provisions of the Company Act, Security Exchange Act.

An analysis of the profitability of the company depicts that the company is incurring losses on each ticket sold and the contribution towards the fixed cost is negative as the revenue per passenger is decreasing year on year, whereas the expenditure is increasing every year. This is reflected in the accompanying table.

The profitability of the company would further deteriorate had the following prudent accounting estimates made in the financial statements:

The depreciation rates currently used by the company is based on the rates prescribed by the income tax rules based on straight line method and that no deprecation is charged on additions made in the current year in fixed assets. The depreciation rates are not determined based on the useful life of the assets and grossly inadequate resulting in the losses of the company to be understated and correspondingly overstating the fixed assets. The table gives the current useful life of the assets of Necon.

No provisions for bad and doubtful debts have been made in the financial statements against outstanding dues and recoverable on the balances as stated in the table in this page:

NECON has not made any provisions for obsolete, non moving and slow moving spares in the financial statements neither has it disclosed the policy for the same. Further, the valuation of the inventories is made at cost and no consideration has been made for the net realisable value of such spares. As per generally accepted accounting principles, inventory should be valued at the lower of cost or net realisable value and any diminution in the value should be provided for in the books of accounts. This treatment would further increase the losses of Necon.

The services of the 2 Avro aircraft have been discontinued. Further, the Cessna aircraft has been sold at a loss Rs 22.15 million. The spares relating to these aircraft are included in the inventory of Rs 157,616,150. No provision for obsolete, damaged, and non-moving spares has been made in the books of account.

The additional provision if made will increase the losses for the year further. No consideration for diminution in the value of investments in the financial statements has also resulted in the inventory value to be overstated.

Liability on account of staff gratuity has not been considered in the books as the financial statement discloses that such liability is accounted for on cash basis. The gratuity liability has not been quantified. As per generally accepted accounting principles, gratuity should be accounted for on accrual basis. Accordingly, if the liability is provided for, the losses will further increase.

Medical expense liability that had accumulated to Rs 4,901,319 should be charged to expenditure which would further increase the losses for the year.

No liability for accumulated leave and sick leave has been created nor the basis for accounting disclosed. The additional liability would correspondingly increase the losses.

The losses incurred on sale of Cessna 9N-AEF aircraft aggregating to Rs 22,159,451 has been credited to capital reserve. By not disclosing the loss in the profit and loss account, the losses have been understated by a corresponding figure.

The accumulated losses for the period ended 30 Paush 2059 has accumulated to Rs 501,239,214 and the continuation of the company as a going concern is very uncertain.

Sundry Debtors Rs. 33,517,403 The Directors acknowledges that there has been a decrease in the tourists' inflow in the country in the current year by 49% which has had a direct impact on the tourism industry in the country. With tourism badly hit, the agents business has also been affected. As the sales of tickets are done through the agents, recoveries from them against sales made have not been on a timely basis and in some instances the dues may not have been collected. The impact of the bad and doubtful debts will further increase the loss of the company.

Advances, Rs. 124,750,100 Provisions for bad and doubtful advances should be made on account of the following balances as the nature suggests that the recoveries are remote or decision has been made against the company

Insurance claims Rs 1,302,515 (Of Rs 7.3 million the balance seems to be unrecoverable)

Advance income tax Rs 13,243,955 (the possibilities of the decision by the revenue tribunal in the companies favour is very minimum)

Advances to staff, suppliers etc Rs 16,565,444 (Old balances in these accounts or services already availed at the end of the financial year need to be provided for). Additional provisions for bad and doubtful receivables and advances will increase the losses and reduce the balances of advances.

The following details provides the alarming situation of the company, which make its survival as a going concern questionable:

The liquidity position provides the basis for answering the question: Does the company have sufficient cash to pay its current dues on time? Necon's liquidity position is very alarming with acute shortage of cash. It has not been able to service its loans and even interest on both current and long term loans. This is the reason why the interest accrued on loans have been capitalised. The company has not been able to repay the medical expenses of its staff.

The current ratio stood at 1.32 which is less than the minimum required standard of 2:1, hence, the company is facing the risk of not being able to settle its current liability and may face liquidity and solvency problem.

The net worth of Necon is already in the negative with accumulated losses as at 32 Ashad 2058 accumulating to Rs 247,847,226 million against equity of Rs 136,604,500. The accumulated losses as at 30 Paush 2059 has increased to Rs 501,239,214. With additional provisions for bad and doubtful debts, unrecoverable balances, losses on sale of assets, and provision for obsolete inventory, gratuity, leave and medical expenditure, the net worth of the company is expected to further deteriorate.

The review of the balance sheet reveals that the entire investments of the company have been financed by borrowing both short term and long term. Against total assets of Rs 709,460,041 the total liabilities (short term and long term) aggregate to Rs 805,075,268 which gives a debt ratio of 114%. Necon has used the borrowings rather than its owner's equity to fund its assets. This implies that Necon will have difficulty in borrowing additional funds in the future as it has excessively used the borrowings to finance its investment and with the alarming liquidity position and its inability to service its interest and current maturity of debts.

The financial institutions are exposed to the risk of losing their investment in the company as the total exposure as at 32 Ashad 2058 of Rs 537,704,274 far exceeds the current value of assets pledged by the company.

The investment made by the general public in the equity of the company is at a risk of loss as the company's financial conditions are deteriorating day by day. With negative net worth and high debt burden, the company may not be able to make a turnaround in its operation unless there is a drastic recovery of the economy and boom in the tourism industry.

(Based on audited financial statement of Ashad 32, 2058 and some information collected from unaudited balance sheet as of Poush 30, 2059. The latter date corresponds to Jan 14, 2003 and the former to mid-July 2001.)

Also Salt Trading Corporation Ltd. (STCL) is not following the format prescribed by the Company Act 2053 in presenting the financial statements. Some of the major deviations are listed below:

The secured loans have not been segregated into long and short term loans and disclosed as per the company act requirement. The long term loans are to be disclosed under the long term loan schedule and the short term loans under current liabilities. Further the current maturity of the long term loans also needs to be disclosed under current liabilities which have not been done by STCL.

The fixed assets of the company need to be disclosed at cost less accumulated depreciation. The company has not been disclosing the cost of fixed assets but only the written down value brought forward from previous years. This implies that the company does not have proper fixed assets records which provided information on the cost, additions made, accumulated depreciation and the written down value.

Further, investments made in associated companies, listed companies or controlled entities have not been disclosed as per requirement of Company Act.

No provisions for bad and doubtful debts have been made in the books of accounts as there is no system of ageing of debtors. Debtors outstanding for more than six months have not been disclosed as the company does not have proper recording system which facilitates preparation of ageing of debtors.

Loans and advances have not been segregated as per the requirement of the Company Act. Provisions required on bad and doubtful loans and advances have not been disclosed.

Separate schedules for current liabilities and provisions have not been prepared as per requirement. The short term loans have not been disclosed under current liabilities.

STCL has shown a profit of Rs 36,528,624 in the year ending 32 Ashad 2059 (mid-July 2002) and made provisions for income tax amounting Rs 9,870,735 for the year resulting in the net profit for the year available for appropriation at Rs 27,408,707. Based on the analysis of the various account balances, the profit reported for the year by the company is grossly overstated.

The responsibility of preparation of the financial statement is that of the management of the company. The management should ensure that the financial statements are prepared in accordance with the generally accepted accounting standards and that there is no material misstatement in the fair presentation of the operating results as well as the state of affairs. Nubiz review revealed that the financial statements of STCL for the year ended on 31 Ashad 2059 has been materially misstated as profits for the year have been grossly overstated.

The cost of sales for the period has been understated by overstating the inventory as the inventory include the closing stock of tractors and metal detectors aggregating to Rs 37,596,000. The company has not been able to sell any of the metal detectors imported whereas the sale of tractors is only Rs 5,725,000 against total value of import of approx Rs 40,000,000.

The profit for the year of Rs 36,528,624 is a result of incorporating the value of the closing stock of tractors and metal detectors.

Depreciation on fixed assets procured during the year has not been charged in the books of account. The company has procured assets of Rs 8,096,578 during the year. At an average rate of 8%, the additional depreciation for the year would by 647,700.

Further, no provision has been made for damaged, lost assets resulting in the profits for the year and the fixed assets to be overstated.

The financial statement analysis reveals that no provision for interest payable has been made in the books of accounts as the entire interest expenses of Rs 105,032,677 accounted for the year has been reflected in the cash flow statement as paid. Accrued interest up to 32 Ashad 2059 would have decreased the profits reported for the year.

The investment in shares aggregates to Rs 139,636,278 as at 32 Ashad 2059. No provision for diminution in the value of investments has been made based on the lower of the market price and cost of the investment.

The investments made in most of the companies including Khadhya Udhog, Gorakhakali Rubber Udhyog, Butwal Dhago Udhyog, Nepal Industrial Development Corporation, Nepal Coal Ltd, Gharelu Hasta Kala, Morang Sugar Mills, Nepal Hastakala Co Ltd, Exim International, Subarna Pharmaceutical Ltd and Citco Ltd is unlikely to be recovered and provision for losses needs to be made.

Additional provisions will increase the losses of the company correspondingly and reduce the value of investments in the financial statements.

Inventory stated in the financial statement for sugar, salt, coal and fertilizers may be overstated as there is no policy in the company to physically verify stock at year end by zeroing the stocks. As most of the stock of salt and fertilizers are kept in open shed, the losses incurred due to heat and moisture is not accounted for. Additional provision for such losses will increase the losses and corresponding reduces the value of inventory.

As there is no system of ageing of the debtors no provision for bad and doubtful debts have been made. The management has acknowledged that no provisions for bad and doubtful debts have been made in the financial statement which has resulted in overstatement of the reported profits for the year and the fair value of debts on the balance sheet date. Accordingly Rs 152,192,977 of debts stated in the balance sheet is grossly overstated.

Cash in transit of Rs 10,392,690 in the financial statement does not signify that the controls over fund transfer between branch offices are sound and free from risk of loss. These balances may also include old balances which have not been accounted for or have been lost. Additional provisions for losses on this account are needed. This means profits figure in the statement are overstated. The value of cash in transit comes down if the provisions for such losses are made.

Loans and advances include advances disbursed to associate and subsidiary companies including Morang Sugar Mills Rs 140,398,512 and others Rs 155,769,372. Since the financial conditions of most of the associated/subsidiary companies including Morang Sugar Mills, Gorakhkali Rubber Udhyog, Butwal Dhago and others are very bad the recoveries of these advances seems to be very remote possibilities. Additional provisions for losses for non recovery have not been made resulting in overstatement of such advances and corresponding overstatement of the fair value of the loans and advances.

Further, loans and advances of Rs 229,752,258 including advance for income taxes would include old advances which are doubtful of recovery for which no provision for losses have been made. Additional provisions under this head would further increase the losses for the year.

Staff gratuity and leave are accounted for on cash basis by the Company which is not in compliance with the generally accepted accounting standards. Staff gratuity liability and liability for leave should be accounted for on accrual basis, i.e., the liability at year end on these accounts should be estimated and provided for in the books of account.

Had the gratuity and leave liability ascertained and provided for, the losses for the year would further increase correspondingly increasing the liabilities of the company.

The company continues to show profits through operation since a number of years whereas it acknowledges that losses are incurred on the above account balances through disclosure in the financial statement (significant accounting policies and notes to accounts). The management is fully aware of the consequences of non providing the losses incurred by the company on its investment but has intentionally ignored the fact and has made the following cash outflows:

The recognition of the losses in the above account balances would result in a loss not only for the review year but for prior years as well. The company has distributed bonus to staff by artificially reporting profits for the year and earlier years.

Reward to directors is based on profits of the company. In case losses are reported, the directors are not entitled to rewards. Accordingly, the management has ignored the losses incurred on various assets of the company and reported profits for the review year and earlier year. The reward to directors is being distributed based on "made up" profits.

Dividend is being distributed by the company on overstated profits. Dividend of Rs 7,433,310 in 2058-59 and Rs 6,194,425 has been distributed whereas the company has not been able to service its interest and pay its current liabilities on a timely basis.

The financial condition of the corporation is not at all sound. However certain book adjustment have been made in the review year giving a misleading picture of the health of the corporation to the stakeholders.

Certain land at the regional and branch offices have been revalued to Rs 395,186,375 thereby increasing the reserves of the company. As these reserves did not generate any cash inflows (so it can not be utilized for other specific purposes), this seems to have been only an window dressing exercise. Moreover, only some selected properties are revalued. It seems only those properties are revalued in which there is price appreciation. Property in which price has reduced are not revalued.

The transfer to general reserves of Rs 10,000,000 is made out of overstated profits and if all the losses on assets of the company are provided for, the accumulated profits and general reserve of the company aggregating to Rs 30,914,098 will be completely wiped out and would also wipe out the equity of the corporation which is only Rs 24,777,700. This will result in a negative net worth.

The special salt fund was created as per the policy of the government and has to be refunded to the government. STCL has not earmarked investments against this fund which has accumulated to Rs 40,497,694. Demand, if any, made by the government for refund of the balances in these funds will end up in a very adverse liquidity position for the company.

The review of the balance sheet reveals that the entire investments of the company have been financed by borrowing both short term and long term. Against total assets of Rs 1,302,928,787, the total liabilities (short term and long term) aggregates to Rs 1,200,995,933 which gives a debt ratio of 92.17%. STCL has used excessive borrowings rather than its owner's equity to fund its assets.

The debt equity ratio of STCL as at 32 Ashad 2059 is 36.5:1 against a standard 2:1. This implies that STCL will have difficulty in borrowing additional funds in the future as (1) it has excessively used the borrowings to finance its investment, (2) has an alarming liquidity position and (3) is unable to service its interest and current maturity of debts.

The debts of STCL as at 32 Ashad 2059 aggregates to Rs 902,800,238 which has been increasing year on year. The Company has not been able to service its debts to the commercial banks and financial institutions. Every year it has been obtaining new facilities with the newly established commercial banks whereas it has been defaulting in repayment of dues to the other commercial banks.

The financial institutions are exposed to the risk of losing their investment in the company

STCL has a very high exposure of lending compared to its equity base. There is a mismatch of financial resources resulting in cost to be high. In addition to the direct exposure in terms of significant lending increasing the risk, the company has indirect exposure in the form of guarantees issued to commercial banks for loans advanced by the latter to subsidiary and associated companies. The management has disclosed that it is unable to disclose the value of such guarantees issued as the current recording system would not facilitate in ascertaining such amount.

STCL faces significant risk of losses on account of default by the subsidiary/associated companies in repayment of loans to the commercial banks. As most of the subsidiary/associated companies of STCL are technically insolvent, it is highly likely that the liability for repayment of such loans will be passed on to STCL.

This will significantly increase the losses of STCL which when combined with the effects of the above material misstatements in financial statements will cause the company to be a technically insolvent business enterprise putting into risk the investments made by the general public and the financial institutions and other shareholders.

The auditors have issued a clean opinion on the state of affairs of the company and results of operation for the year ended on 32 Ashad 2059.

Taking into consideration the material misstatements made in the financial statements as a result of non disclosure of certain items resulting in significant uncertainties and non provisioning of losses incurred in investment, debtors, inventory, loans and advances etc, an adverse opinion or a disclaimer of opinion would have been appropriate.

The debt equity ratio of the company was maintained at an unacceptable level of 1.81 in the previous year. No action was taken by the management to curb the discrepancy noted. However, additional loan amounting to Rs 6,80,29,242 was availed during the review year further worsening the debt-service period. During the review year debt-equity ratio stood at 1.94.

The conditions on which the term Loans, time Loans, working capital loan are audited is to be disclosed in the notes to accounts. Further, loan secured by mortgage of land occupied by the hotel building and against the security of fixed and current assets in existence, needs separate disclosure in the "Notes to Accounts and Significant Accounting Policy" followed by the company.

In analysis of the depreciation rates followed by the company the following are noted:

The useful life estimated is not reliable. Due to low depreciation rates applied, the financial figure does not depict the actual operational condition.

No provision against bad and doubtful debtors and creditors has been made thereby inflating the profit figure. Bad and doubtful debtors policy has not been formulated at all. Independent confirmation has not been obtained.

The current ratio of the company stood at 0.92 in the previous year which is significantly lower than the standard required of 2:1. Hence, the solvency of the company was questionable in the previous year itself. The company is in liquidity crisis as the current ratio is 0.85 in the current year. The company has inadequate fund to meet the reported current liability.

The schedule for deferred revenue expenditure is not descriptive as additions to the fund has not been adequately disclosed. Rs 40,163 addition to deferred revenue expenditure is not explained.

The format used for presentation of the financial statement is not in accordance with the format as prescribed by the Company Act, 2053.

# Profit/loss made on the sale/ transfer of the fixed assets has not been separately disclosed in the profit & loss account.

# Rebate/discount given account amounting to Rs 492,799 should be shown after netting off of the same from the revenue and not as administration expenses.

The overall salary, allowance and wages has reduced by Rs 380,081. However, the provident fund contribution has increased by Rs 297,278, which is not clarified. Similarly, Dashain expenses have increased by Rs 110,092.

Fee to consultants equaling to Rs 531,346 has been disclosed in the payroll cost and benefits, however, again Rs 4,430,834 is disclosed under administration and general expenses, which is not clear. As per the accepted accounting practice payroll cost and benefits need to be comprised of costs related to the employee of the company only.

The company has expended Rs 324,822 per month as house/ land rent (previous year Rs 316,194) which is considered to be excessive.

Financial charge of Rs 668,738 is accounted for as administrative and general expenses. Further, Rs 84,679,690 is accounted for as interest expense in the face of the profit and loss account. The reduction in the interest expenses in spite of the increase in the availed loan is not clarified.

Though it is stated in the notes to accounts that gratuity and other retirement benefits have been provided for as per the requirement of the relevant Acts, the amount set aside for the purpose has not been disclosed in the financial statement, thus making the financial statement vague.

Interest amount as disclosed in the financial statement is not reliable as the same is pending approval from the board/designated authority of the respective bankers or financial institution.

Foreign exchange fluctuation gain/loss has not been separately disclosed in the financial statement though the same is required as per format prescribed by the Company Act, 2053.

The operating leverage of the company is in the negative in the review year, which has deteriorated in the current year as compared to the operating leverage of 10.90 in the previous year. The profit before depreciation, interest and taxes was not sufficient even for covering the depreciation charge of the current year, which depicts the financial crisis in the organization. The interest coverage ratio of the company, which stood at -0.28 (previous year minimal of 0.21) further puts light on the financial illness of the company.

Basis of depreciation calculation used (for Oriental Hotels)
	Depreciation Rate applied	Useful life estimated
Building	1.65	60 years
Plant & Machinery	5.42	19 years
Furniture & Fixtures	5.28	19 years