It’s not only the professional accounting bodies that are concerned with auditors reporting responsibility, regulators such as the Ministry of Corporate Affairs has also attempted to regulate the reporting requirement through the 2013 Act. The Act requires auditors to report additionally on matter such as adequacy of internal financial controls system and whether those are operating effectively; observations or comments on ‘financial transactions’ or matters having an adverse effect on the functioning of the company; disclosure of pending litigations on its financial position in its financial statements; provision for foreseeable losses, if any, on long term contracts including derivative contracts etc.

What’s interesting is that while directors are required to comment only in the case of listed companies, auditors are required to report in all cases. Similarly, the requirement with respect to reporting on financial transactions or matters having an adverse effect on the functioning of the company appear to be vague and ambiguous and would require guidance from the Institute of Chartered Accountants of India in terms of the procedures and the nature of matters to be reported. In view of the increasing challenges, “it’s time to question the audit status quo” and thus, there is no geometrical model which can substitute the need of audit re-engineering. An attempt has to be made by the professionals themselves to meet the growing expectations of stakeholders. The time has come to navigate through the grey area and convert the threat into opportunity.

Bridging the gap

After the notification and implementation of the revised Schedule VI of the Companies Act, 1956, the format of Statement of Assets & Liabilities in SEBI (ICDR) Regulations, 2009, has been updated and brought in line with the requirements of the Act. The revised format is also in line with the requirements of the Companies Act, 2013, as Schedule III has adopted the same format notified under the revised Schedule VI of the 1956 Act. With this, SEBI takes a step towards harmonisation.

The area that requires immediate attention for harmonisation is independent directors. The norms with respect to remuneration, tenure and composition of board vary under SEBI’s listing agreement and the Companies Act, 2013. For instance, there is no prohibition on allotting employee stock options to the independent directors under SEBI’s listing agreement; similarly the listing agreement does not mandate a fixed tenure for the office of the independent director.

Improving disclosure quality

The Equity Listing Agreement mandates listed companies to make periodic and event-based disclosures which are price sensitive in nature. While listed companies have been making disclosures to stock exchanges within the stipulated timeframe, concerns have been expressed with respect to quality and accuracy of content of the disclosures. This adversely impacts the ability of investors to take well-informed decisions.

In a recently issued directive, SEBI, the capital market regular, has advised stock exchanges to put in place an appropriate framework to effectively monitor the adequacy and accuracy of the disclosures made by listed companies. In case of discrepancies in disclosures, stock exchanges can seek further clarification and information. Further, stock exchanges are required to submit an exception report to SEBI with details of companies that do not respond to the clarifications sought by them and/or where the submitted response is not satisfactory. Listed companies would need to perform due diligence and adequately review their disclosures before filing with the stock exchange.

Election time relief

The Companies Act, 2013, provides for detailed disclosures w ith respect to contribution to political parties. In the draft rules published for public comment, various sections of industry had expressed concerns about naming the political parties as it could lead to victimisation. In a partial relief to the industry, the Ministry of Corporate Affairs has clarified that companies contributing any amount to an electoral trust company for contributing to political parties are not required to make disclosures required under section 182(3) of the Act. It will be sufficient if the accounts of the company disclose the amount released to an electoral trust company. However, companies contributing directly to political parties will be required to make the disclosures laid down in section 182(3) of the Companies Act, 2013.

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