Adverse auditor report to force a/c restatement
Apanel
appointed by the Securities Exchange Board of India, or Sebi, has cleared a
proposal that requires listed companies to restate their financial statements if
their auditor comes up with adverse comments, commonly called audit
qualifications. The
decision, if endorsed by the Sebi board, will give the stock exchanges an
overarching authority to call for restatement of a company’s accounts."A
proposal to this effect has been cleared," said an official privy to the
discussions in the sub-group on accounting irregularities.The chief executive
officer or chief financial officer of a company will bear the cost of the fresh
audit. This will ensure that those responsible for the mistake pay for the folly
and not the shareholders.The Committee on Disclosures and Accounting Standards
on Friday recommended that stock exchanges be authorised to ‘prima-facie’ act
on any ‘material’ qualification made by an auditor to seek a restatement of the
company’s accounts.Listing agreement that stock exchanges enter into with
companies will have to be modified to accommodate the new rule, the official
said requesting anonymity.The proposal, if accepted, will provide auditors a final say on a company’s accounts as compared to the
current practice of making a note of their qualified remarks. As per the
proposal, while filing their annual reports companies will have to submit a
declaration before the exchange giving details about the audit qualifications,
if any.The stock exchange can then seek further inputs from the company and the
auditor.Based on the information, the stock exchange will have to decide if the
audit qualifications raised are ‘material’. The exchange can then forward the
case to Sebi.The regulator will discuss the seriousness of the qualifications
with the Institute of Chartered Accountants of India before ordering the
company to restate its accounts.The committee has defined a material
qualification as one, which if corrected, may influence the decisions of the
users of the financial statement. While
considering the nature of qualification, aspects on corporate governance and
impact on future results will be considered, it said"Asperthedraftreport,thecostofpreparing,
auditing and distributing the restated accounts will be borne by the CEO/CFO of
the company," said the official."In most developed capital markets,
an audit qualification is looked at seriously,” said Dolphy D’Souza, partner at
Ernst & Young. “Sebi is trying to instill the same discipline in