10 Red Flags That Exposed a Troubled EPC Company

In the world of engineering, procurement and construction (EPC), financial complexity is expected — but not at the cost of accountability. A recent forensic investigation into an EPC company reveals a tangled web of irregular transactions, liquidity crises, compliance failures and audit red flags. Conducted by a joint investigation and forensic audit team, this case presents a critical study in early warning signs, oversight breakdowns and how financial engineering can mask operational distress. 

Uncovering the Red Flags 

The investigation began when recurring abnormal transactions and financial inconsistencies were reported in the company’s accounts. A detailed forensic review revealed a series of systemic and strategic failures: 

1. Debt Servicing Failures 

The company failed to meet its obligations on non-convertible debentures even after investors exercised the put option. Interest on cash credit facilities was routinely delayed, signaling deep liquidity issues. 

2. Stressed Liquidity 

The company’s cash flow was under severe strain. A majority of its cash accruals were tied up in receivables, with recovery timelines uncertain. Asset monetization was also pending, posing a serious operational risk. 

3. Mismanagement of Financial Instruments 

Multiple bank guarantees and letters of credit had been invoked or devolved, yet no proper regularization had taken place. This reflected both procedural lapses and weak financial governance. 

4. Audit Qualifications and Control Weaknesses 

Joint statutory auditors raised significant concerns, including: 

• Inadequate evaluation of recoverability for long-outstanding balances, including unbilled revenues, trade receivables, loans and project site inventories. 
• Improper provisioning for credit-impaired assets and flawed fair value assessments.
• Misclassification of several non-current assets (including trade receivables and arbitration-related balances) worth $3.5 billion as current assets. 

5. Statutory Non-Compliance 

The company had accumulated: 

• Unpaid statutory dues totaling $39.78 billion. 
• Undeposited Tax Deducted at Source (TDS) of $88.16 million, with delays ranging from 6 to 8 months.
• Non-deposited provident fund dues of $55.56 billion.  

These not only attract penal consequences but raise serious red flags for regulatory non-compliance. 

6. Accounting Irregularities 

Deferred receivables of $54 million were misclassified as current assets. Further, non-current assets worth $120 million were incorrectly reported under term liabilities, violating fundamental accounting principles. 

7. Supplier Advance and Receivable Risks 

$70 million in advances to suppliers appeared unrecoverable with no provisions made. Similar issues were observed with disputed receivables and cases where materials were not received despite advance payments. 

8. High Leverage and Cost of Capital 

The company's interest coverage ratio hovered at 1.20, indicating an inability to generate sufficient profits to cover debt obligations. Inter-corporate deposits (ICDs) were serviced at interest rates as high as 12–15%, significantly impairing profitability. Alarmingly, some ICD repayments (totaling $55.67 million) were made without lender consent. 

9. Legal Exposure 

The company was embroiled in a large number of litigations — both as plaintiff and defendant. These ranged from supplier disputes to project overruns and delays in site handovers. No provisions were made for cost overruns, despite their material impact on ongoing projects. 

10. Investments Outside Core Operations 

Funds amounting to $114.56 million were invested in subsidiaries, joint ventures and mutual funds, even as the parent company struggled with cash flows. These investments were not liquidated or reallocated, despite clear financial stress. 

Key Takeaways for Fraud Examiners and Auditors 

This case provides valuable insight into the systemic issues that can plague large-scale EPC operations and the importance of forensic scrutiny in uncovering them: 

Adopt a Risk-Based, Objective Approach 

Tailor forensic audits to the unique risks of the industry. EPC companies are capital-intensive, contract-driven and highly reliant on receivables — requiring industry-specific red flag identification. 

Use Public Domain Checks Strategically 

Background checks on related entities, vendor affiliations and directors can uncover concealed relationships and undisclosed risks. 

Prioritize Transaction Testing 

Detailed transaction mapping helps trace fund flows, identify potential round-tripping and spot misuse of company funds. 

Study Financial Statements Deeply 

Annual reports, audit qualifications and management discussion sections often contain subtle yet revealing red flags. Disclosures around contingent liabilities, receivables aging and asset provisioning can be particularly instructive. 

Forensic investigations are not just about identifying what went wrong — they are about understanding why it went wrong and how to prevent recurrence. In this EPC company’s case, weak internal controls, poor cash management and regulatory non-compliance created a perfect storm. For anti-fraud professionals, this is a stark reminder: early red flags, if ignored, can evolve into full-blown corporate crises.