When filing annual reports with stock exchanges for the period ending on or after December 31, 2012, listed companies now need to file Form A or Form B, depending on the type of audit observation/ qualification in the audit report. This is a seemingly minor change, but has multiple repercussions for various stakeholders. It should be noted that the listed company, on account of the equity listing agreement with stock exchanges, now also agrees to restate its books of account on the directions of SEBI or any other statutory authority, under the extant regulatory framework.
There are several implications for regulators, investors, auditors and, of course, companies themselves.
Stock exchanges
On receipt of annual reports, stock exchanges would now
carry out a preliminary scrutiny of the reports in Form B twice a year — June and December;
When the shares of a company are listed on more than one exchange, the exchanges would consult each other on the criteria for the preliminary scrutiny and distribution of work. This would include
seeking explanations from the company;
ascertaining the impact of the qualification on the company’s financial results and corporate governance.
This would lead to greater transparency and interaction between stock exchanges for the common good of stakeholders. When there is need for further examination, the reports would be forwarded to the Securities and Exchange Board of India.
Regulators
SEBI has constituted a Qualified Audit Review Committee (comprising representatives from the ICAI, stock exchanges and others) to review cases received from stock exchanges and guide SEBI. If, prima facie , the committee finds that qualification is not significant, it may suggest steps for rectification; if the qualification is significant and the company’s explanation unsatisfactory, the FRRB (Financial Reporting Review Board) may be consulted on the need for restatement in the company’s books of account.
Where the audit qualification is not quantifiable, QARC may suggest rectification.
If the ICAI-FRRB does not find the audit qualification justified, the statutory auditor may be asked for clarifications.
If the qualification is seen as justified, SEBI may
ask the listed company to restate its books of account in accordance with statutory requirements and inform shareholders through the stock exchanges;
direct the company to reflect these restatements in the annual report for the subsequent financial year.
Thus, the regulators, SEBI and ICAI-FRRB would now work closely to protect stakeholder interests. The regulators should be equipped for the task, given the number of companies listed on various stock exchanges.
Stakeholders
Stakeholders would have more information on hand to take informed decisions on transactions with the company. With the audit report issued by an independent auditor now under regulatory lens, stakeholders can place greater reliance on the annual report, and gain confidence from the regulators’ increased role in the financial information of the company.
Auditors
When forming an opinion, the auditor should ensure that the communication with the company’s management, those charged with governance and audit committees is timely and appropriate. He/she should consider whether the inclusion of a qualification/ emphasis of matter in the audit report is justified under the auditing standards.
The audit evidence, based on which the auditor draws opinion, should withstand scrutiny by regulators. Accordingly, the evidence should be appropriately documented, including the rationale for professional judgements on various matters.
Listed companies
With regulators taking various measures to protect stakeholder interests, the company should ensure that matters impacting its financial position are adequately addressed before approving financial results. It may need to institute additional processes to facilitate responses, individually or together with auditors, to SEBI-QARC/ ICAI-FRRB.
However, the finer details on the process and timelines are unclear, which may leave financial statements open to adjustments for indefinite periods.
This may also create regulatory issues, such as compliance with Companies Act, 1956. For example, once the company’s annual general meeting has been held and the accounts adopted, there should be an enabling provision to rectify financial statements where required.
While the amendment carries wide implications, more thought should be given to it before implementation.
Harinderjit Singh is Partner, Price Waterhouse