A committee set up by the Securities and Exchange Board of India, or
SEBI, will scrutinise all auditor qualifications of balance sheets of
listed companies and ask the management to restate numbers in case of
violation of accounting rules.
Top officials close to the
development told ET that SEBI would discuss this issue at its board
meeting on June 26. The market regulator also proposes to make
electronic voting mandatory, in a move aimed at ensuring larger
shareholders participation.
This comes more than three
years after erstwhile Satyam Computer Services chairman Ramalinga Raju
shocked shareholders by admitting to inflating revenue and cash on the
balance sheet.
Investigations reveal that the auditor Price
Waterhouse was unable to catch the fudging, and questions were raised
about the efficacy of auditing and whether systems were in place to
catch and punish companies by violating accounting rules and
regulations.
Auditors have long argued that their role comes to
an end after they spell out their qualifications on a firm's annual
report and that penalty is the work of the stock exchanges and the
regulator.
The new committee will be called the Qualified Audit
Report Review Committee (QARC). The Financial Reporting Review Board
(FRRB), a committee of the Institute of Chartered Accountant of India
(ICAI), had pointed out some time ago that certain listed firms' annual
report with qualifications have accounting irregularities in nine areas,
including consolidation of joint ventures, value of investment shown in
the balance sheet, and provision made for recovery of debts or advances
that are considered doubtful.
"If, prima facie, the committee is
of the view that the qualifications are significant and the explanation
given by the management or the board's audit committee is
unsatisfactory, the case may be referred to ICAI - FRRB," a person with
knowledge of the development said.
"If FRRB finds the
qualifications to be justified, SEBI would ask the company to restate
its accounts and re-adjust its books in the next financial year," he
added. In the interest of transparency and protecting investors from
misleading management claims, SEBI would ask stock exchanges to publicly
display the name of companies that file accounts with Form B.
After
the proposed changes, all listed entities with auditors' qualifications
in their annual reports will have to submit a specially designed Form B
to the stock exchanges. This document will need to be signed by the
firm's CEO or managing director, chief financial officer and auditor of
the company.
This will help the stock exchange in monitoring
the qualifications. Stock exchanges will carry out an initial scrutiny
of firms who submit Form B, and considering the materiality of
qualifications, would refer cases to the QARC via SEBI.
In the
June 26 board meeting, the SEBI board is also likely to make electronic
voting mandatory for all listed companies for nine businesses decisions
for which consensus is sought through postal ballot. Such decisions
include buy-back of shares, issue of shares via differential voting
rights, and election of directors.
SEBI has observed that though
postal ballots have provided shareholders the facility to participate in
companies' decisions without attending the meeting, it is yet to
achieve 'the desired objective of large participation of shareholders.'
"Generally, a number of postal ballot forms returned are negligible,
perhaps because the ballot form may not have reached the shareholders on
time," said a market participant, who didn't want to be named as the
matter is still under SEBI's consideration.