CIRCULAR
CIR/CFD/DIL/7/2012 August 13, 2012
To
All the Stock Exchanges
Dear Madam / Sir,
Sub.: Manner of Dealing with Audit Reports filed by
Listed companies
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”.
Yours faithfully,
Sunil Kadam
General Manager
+91-22-26449630 sunilk@sebi.gov.in
Annexure: Amendments to Equity Listing Agreement
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
|
Receipt of reply from ICAI-FRRB
|
One month from the date of referral by
QARC
|
|
6
|
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 observation
|
Qualified…../ Subject to …../ Except
for……
|
|
4
|
Frequency of observation
|
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”.