The Hindu Business Line : Caught in a time warp

Part II of Schedule VI of the Companies Act, 1956 requires disclosure of licensed capacity. That licences have been abolished, save for a couple of items, has not occurred to the Department of Company Affairs (DCA). The relic of the past has been allowed to continue. This is not the only instance of a weed needing to be pruned.

Hangover of the past

The whole of lot disclosure required on the foreign exchange front, especially with reference to import of materials, components and capital goods, harks back to days of foreign exchange shortages. Apart from the provisions being antediluvian, the very idea of government laying down the disclosure norms is at odds with the idea of accounting standards.

It is not for the government to specify what all disclosures must be made in the foreign exchange front because the applicable accounting standard on the subject admirably deals with the issue. Similarly, disclosures relating to depreciation are well taken care of by the accounting standard on depreciation. The short point is too many cooks spoil the broth.

Moreover, setting of accounting standards must be left to an expert body which, at present, is the Accounting Standards Board of India (ASB), constituted by the Institute of Chartered Accountants of India. The ASB must be relied upon to sift through the connected international standard on a given issue before bringing in its own which, in any case, is what is happening now. In the event, the fiat for formatting and disclosure too is a relic of the past, which must be discarded sooner than later. Such fiats had utility in an era when accounting standards weren't even talked about.

Info overload

Time was when the names of employees drawing more than Rs 36,000 per annum were mandated to be disclosed along with the amount of salary in the board report. Now the limit has been steeply revised to Rs 24 lakh per annum.

Apart from swelling the chests of the employees whose names have thus been disclosed, there seems to be no other utility in such a disclosure. If anything, such candidates become vulnerable to poaching by rivals, detrimental to the interests of the company.

Another area of information overload relates to conservation of energy and technology absorption. Besides inviting a yawn from shareholders, the information may be used by rivals to steal a march over the company.

Despite the reassurance given by the DCA that nothing can be construed as amiss when all the three significant documents compendiously referred to as annual report — accounts, directors' report and auditors' report — bear the same date, many shareholders are indeed ill at ease in finding this identity.

Even to a lay reader, the identity of dates is perplexing to say the least, given the fact that an auditor cannot possibly sign the audit report till the accounts are signed. To him, the distinct impression conveyed is audit has been done post-haste and the directors' report, which must give explanations to the negative findings of the auditor, has also been given in a hand-washing spirit. Like justice, audit must not only be done but seem to be done.

Sequence strap

True, auditors' get a head-start and do not wait for the accounts duly signed to be handed over to them. In fact, preparation of accounts, culminating in signature by the directors, and audit go hand in hand. But this is not the sequence contemplated by law. The law contemplates preparation of accounts by directors followed by audit and thereafter directors stepping in again to contemplate auditors' negative findings in order to give reply thereto in their report.

This legally sequenced order requires the accounts to bear a date anterior to the audit report and the directors' report to bear a date posterior to the auditors' report. If all these require more than one board meeting to be held for the purpose so be it.

The auditors must also stop the practice of signing the profit and loss account and balance-sheet for the simple reason that they are not mandated and supposed to. They are only required to sign the audit report.

True, the audit report is on the accounts, and for identification purposes the two must be linked. But this link must be established unambiguously, bringing out the fact that signature by auditors should not be construed as authentication of accounts by the auditors, which they simply cannot as per the very scheme of things.

(The author is a Delhi-based chartered accountant.)

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