The era of qualified company accounts is about to close. Companies will have to restate their financial statements if auditors raise objections to any figure in annual accounts, if the government accepts a proposed recommendation of the Institute of Chartered Accountants of India (ICAI).
Annual reports would contain financial statements that fully satisfy the auditor’s scrutiny. This far-reaching proposal has been cleared by a special group set up by ICAI, which has been asked by the government to submit recommendations for improving financial reporting of companies. The ICAI will shortly transmit its recommendations on the subject to the government. According to the proposal, a company that does not restate its accounts as suggested by the statutory auditor would be barred from paying dividends or raising loans.
At present, an auditor’s scepticism about any portion of the accounts presented by a company is tagged along with the annual report and an investor has to work hard to correlate every auditor qualification with the number or numbers under challenge. If the ICAI special group’s proposal goes through, this torture would be a thing of the past. Accounts would become more transparent, and the auditor would be taken far more seriously than at present by companies. The proposal forms part of a slew of measures to be suggested by the ICAI to the government so as to improve financial reporting standards in the country, said institute’s president Uttam Prakash Agarwal. The proposals could be implemented through amendments to the ICAI Act, a move which has been mooted in the wake of the Satyam financial crisis.
The proposed change would allow all stakeholders to get a easier grasp of a company’s balance sheet, as they will not have to correlate various numbers with the audit report. The proposal, which is being made in an attempt to make companies ’seriously act on auditors’ disagreements rather than merely acknowledging such disqualifications without any changes made to that effect is, however, not new in India. For a number of years, the Securities Exchange Board of India (SEBI) has made it mandatory that companies going in for an initial public offer (IPO) will have to adjust their past results to give effect to all audit qualifications, says Rahul Roy, director at Ernst & Young India. The practice of revising accounts of companies, whose financial data has been questioned by their auditors, is in conformity with globally followed practices. “In most developed countries, all potential audit qualifications are discussed with the company’s management which revises their accounts to ensure there is no disagreement with the auditor,” says Mr. Roy, who has also earlier served as ICAI’s president.