Manner of Dealing with Audit Reports filed by Listed companies - Amendment in Equity listing agreement

*CIRCULAR no. CFD/DIL/7/2012, dated 13-8-2012*

*1.* Clause 31(a) of Equity Listing Agreement, inter-alia, requires listed
companies to submit six copies of annual reports containing audited annual
financial statements to the stock exchanges.

*2.* SEBI, in its continuous endeavor to enhance the quality of financial
reporting being done by listed companies, has now decided to put in place a
system to monitor the audit qualifications contained in the audit report
accompanying the audited annual financial statements submitted by listed
companies. The exact text of amendments to Equity Listing Agreement in this
regard is given in the Annexure to this circular.

*3.* Accordingly, listed companies shall now be required to submit the
following forms, as may be applicable, along with copies of annual reports
submitted to stock exchanges:

• Form A: Unqualified/ Matter of Emphasis Report

• Form B: Qualified/ Subject To/ Except For Audit Report

*4.* The format of Form A and Form B is given in the Annexure to this
circular as part of the amendments to Equity Listing Agreement. These forms
shall be signed by the a) Chief Executive Officer/Managing Director, b)
Chief Financial Officer, c) Auditor and d) Chairman of the Audit Committee.
The information submitted as per these forms shall also draw attention to
relevant notes in the annual financial statements, management's response to
qualifications in the Directors' report and comments of the Board/ Chair of
the Audit Committee.

*5.* Stock exchanges shall adopt the following procedure to process the
audit reports accompanying audited annual financial statements submitted by
listed companies along with Form B:

(*a*) Stock exchanges shall carry out preliminary scrutiny of reports
accompanied by *Form B *including seeking necessary explanation from the
listed company concerned and consider the same based on materiality of the
qualifications. The parameters for ascertaining the materiality of audit
qualifications shall be, the impact of these qualifications on the profit
and loss, financial position and corporate governance of the listed
company. For the purpose of uniformity, stock exchanges shall consult one
other for deciding the criteria for preliminary scrutiny. Further, stock
exchanges shall also consult one other for distributing the work in case
shares of the listed company concerned are listed on more than one stock
exchange.

(*b*) Upon examining the audit reports based on the above parameters,
stock exchanges shall refer those cases, which, in their opinion, need
further examination, to SEBI.

(*c*) SEBI has constituted the 'Qualified Audit Review Committee' (QARC)
with representatives from Institute of Chartered Accountants of India
(ICAI), stock exchanges, etc. The QARC shall review the cases received from
the stock exchanges and guide SEBI in processing the qualified annual audit
reports referred to by the stock exchanges.

(*d*) After analyzing the qualifications in audit reports, QARC may make
following recommendations:

(*i*) If, prima facie, QARC is of the view that an audit qualification is
not significant, it may suggest steps for rectification of such
qualification;

(*ii*) If, prima facie, QARC is of the view that an audit qualification is
significant and the explanation given by the listed company concerned/its
Audit Committee is unsatisfactory, the case may be referred to the
Financial Reporting Review Board of ICAI (ICAI-FRRB) for their opinion on
whether the qualification is justified or requires restatement of the books
of accounts of the listed company;

(*iii*) If an audit qualification is not quantifiable, QARC may suggest
rectification of the same within a stipulated period.

(*e*) If ICAI-FRRB opines that an audit qualification is justified, SEBI
may ask the listed company concerned to restate its books of accounts in
compliance with the statutory requirements and inform its shareholders
about the same by making an announcement to the stock exchanges. SEBI may
also direct the listed company concerned to reflect the effect of these
restatement adjustments in the annual report of the subsequent financial
year.

(*f*) If ICAI-FRRB is of the view that an audit qualification is not
justified, ICAI may ask the statutory auditor of the listed company
concerned to provide necessary clarifications and may take appropriate
action.

(*g*) The scrutiny of all audit reports filed as per Form B shall be
carried out twice a year based on the reports received up to half year
ending on June and December of every year and for this purpose, the
following timelines are prescribed:
*Activity * *To be completed by* Filing of annual audit reports by
the listed companies As per the provisions of the Listing Agreement
Preliminary
scrutiny of the reports received during the half year (Jan - Jun and Jul
-Dec each year) by stock exchanges and referring applicable cases to SEBI One
month from the end of half year ending on June and December each year. Review
of the cases by QARC One month from the date of receipt of report from the
Stock Exchanges. Referring applicable cases to ICAI-FRRB Fifteen days
from the date of decision of the QARC Receipt of reply from ICAI- FRRB One
month from the date of referral by QARC Communication of decision on the
case to the listed company concerned and the stock exchanges. This also
includes reports received directly from ICAI-FRRB with a recommendation of
restatement. Fifteen days from the date of receipt of reply from
ICAI-FRRB Publication
of restated financial results by the listed company concerned. Within two
months from the date of letter of communication to the concerned entity.

(*h*) SEBI may, at any stage, in the interest of investors, take necessary
action as it deems fit, including mandating restatement of books of
accounts.

(*i*) Stock exchanges shall display the list of companies which have filed
their audit reports along with Form B.

*6.* This circular is issued in exercise of the powers conferred under
Section 11 read with Section 11A of the Securities and Exchange Board of
India Act, 1992.

*7.* All stock exchanges are advised to ensure compliance with this
circular. This circular is applicable to all annual audited financial
results submitted for the period ending on or after December 31, 2012.

*8.* This circular is available on SEBI website at www.sebi.gov.in under
the categories "Legal Framework" and "Issues and Listing".

*ANNEXURE*

*Amendments to Equity Listing Agreement*

1. In Clause 31 of Equity Listing Agreement, in sub-clause (a), after the
term " Directors' *Annual Reports*", the following shall be inserted,
viz.,:-

"along with Form A or Form B, as applicable, the proforma for which shall
be as under:-

*FORM A*

*Format of covering letter of the annual audit report to be filed with the
stock exchanges*
1. Name of the Company: XYZ Ltd. 2. Annual financial statements for
the year ended 31st March ….. 3. Type of Audit observation
Un-qualified/Matter
of Emphasis 4. Frequency of observation Whether appeared first time
…./repetitive …./since how long period ….. 5.

To be signed by-

*• *CEO/Managing Director

*• *CFO

*• *Auditor of the company

*• *Audit Committee Chairman


*FORM B*

*Format of covering letter of the annual audit report to be filed with the
stock exchanges*
1. Name of the Company: XYZ Ltd 2. Annual financial statements for
the year ended 31st March …… 3. Type of Audit qualification Qualified…../
Subject to …../ Except for…… 4. Frequency of qualification Whether
appeared first time …./repetitive …./since how long period ….. 5. Draw
attention to relevant notes in the annual financial statements and
management response to the qualification in the directors report: May give
gist of qualifications/headings (Refer page numbers in the annual report)
and management's response 6. Additional comments from the board/audit
committee chair: This may relate to nature of the qualification including
materiality, agreement/disagreement on the qualification, steps taken to
resolve the qualification, etc. 7.

To be signed by-

*• *CEO/Managing Director

*• *CFO

*• *Auditor of the company

• Audit Committee Chairman"


2. After Clause 31, a new Clause 31A shall be inserted, viz., :-

"31A. The issuer agrees to restate its books of accounts on the directions
issued by SEBI or by any other statutory authority, as per the provisions
of the extant regulatory framework".

/