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.
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.
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