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SEBI diktat on mandatory disclosure of forensic audit is good in intent but needs fine-tuning

K.R.Srivats New Delhi | Updated on October 13, 2020 Published on October 13, 2020

Thresholds for disclosures will save companies from adverse market sentiment, says experts

SEBI has set the cat among the pigeons in Corporate India by mandating listed companies to come up with certain disclosures to bourses on forensic audits undertaken in such enterprises.

Not only would listed companies be required to disclose the initiation of the forensic audit, name of the entity initiating such an audit and the reason for such initiation, but also have to make available the final forensic audit report to the stock exchanges with comments of the management, if any.

However, companies need not disclose the final report where the forensic audit has been initiated by the regulator or the enforcement agencies.

Challenges to firms

While this SEBI move to amend the Listing Obligations and Disclosure Requirements (LODR) for this purpose is laudable, it, however, brings some challenges for listed companies. The non-application of materiality may make these norms seem onerous for companies, feel experts.

Nikhil Bedi, Leader-Forensic, Deloitte India, said the intent of SEBI is to increase transparency and disclosure requirements. Some organisations may, however, consider these requirements as onerous due to non-application of materiality as historically disclosures were only made by companies when the suspected amounts were material to a company’s operations,

The current mandate may discourage companies to initiate forensic audits of small matters (such as employee expense reimbursement fraud), fearing adverse publicity and market sentiment, he pointed out.

SEBI must, therefore, consider some thresholds/yardsticks on these disclosure requirements to strike a balance, suggested Bedi.

CA Institute President Atul Kumar Gupta felt the SEBI move will be detrimental to companies. Gupta prefers a regime where the points raised in the forensic audit report are put through a materiality test and only significantly material ones as approved by the SEBI are sent to stock exchanges for public disclosure. He also sees the need for a regime where all public interest entities in India are once in every three years put through forensic audit and either ICAI or SEBI could set up a panel for the appointment of forensic auditor.

He also suggested that there should not be any exceptions to the rule and even forensic audits mandated by regulatory and enforcement agencies must have the same disclosure requirements as forensic audits initiated by the company.

Bedi felt that it would be advisable to include disclosure of all forensic audits, including those commissioned by regulatory or investigative agencies, as this would increase transparency.

At the same time, while the new disclosure regime may be perceived as onerous by some companies, it can lead to increased focus on investing in fraud prevention mechanisms to detect red flags early on which is a need of the hour. This can spur lot of emphasis on anti-fraud activities, strengthening anti-fraud controls, putting in place whistle blower systems and monitoring them and taking action, according to Bedi.

Bedi believes that SEBI mandate needs to be seen as a measure to build confidence among organisations. Globally, similar mandates have pushed organisations towards adopting mature fraud-risk management practices.

The bottom line is that SEBI’s latest action mandating disclosures of forensic audit is good step, but need some fine tuning in terms of introducing materiality for such disclosures

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Published on October 13, 2020
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