Hitherto, Sequoia only conducted due diligence before investing in a company.

Sequoia Capital’s regional arm in South and Southeast Asia is considering special audits for several investments in the region following allegations of financial irregularities at companies such as Zilingo Pte and GoMechanic. This was reported by Bloomberg, which quoted unnamed, confidential sources.

The venture capital firm will work with Ernst & Young on some of these audits and will increase budget allocations to help investee companies implement systems that ensure better governance. Sequoia Capital India will also be more selective when taking up board positions at funded startups. It might even go so far as to replace junior board members from their team with more senior partners.

Sequoia previously limited due diligence to companies before investing in them. The expanded diligence is therefore a departure from its usual investing procedures.

The development is a reaction to the recent incident at GoMechanic, a Sequoia portfolio company, where EY conducted a due diligence on behalf of prospective investors only to find various accounting irregularities. The investors backed out from investing in the company.

GoMechanic founder Amit Bhasin admitted the discrepancies on LinkedIn: “We made grave errors in judgment as we followed growth at all costs, particularly in regard to financial reporting, which we deeply regret. We take full responsibility for this current situation and unanimously have decided to restructure the business while we look for capital solutions.”

However, on the subject of special audits, a Sequoia spokesperson stated to Bloomberg via email: “As a matter of practice, Sequoia Capital India & Southeast Asia conducts due diligence ahead of new, first-time investments. We may conduct diligence ahead of a follow-on round; at this juncture, we have not put a mandate for special audits.”

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