Ticking another box

Mohan R Lavi | Updated on January 20, 2018 Published on June 29, 2016


SEBI's circular on auditor comments is absurd

Soon, corporates in India will have positions titled Manager (Disclosures) in their finance departments, given the pace at which regulators mandate disclosures. Just a month ago, on May 27, market watchdog SEBI issued a notification amending the manner in which listed companies disclose ‘qualifications’ made by auditors.

Analysts, shareholders, investors, bankers and pretty much everyone interested in an entity would be keen to know if there are any qualifications made by the auditors in their report. A qualification would mean that the company has not followed the prescribed accounting treatment in certain areas or that the judgment and estimates made by the management are erroneous, or that something in the company smells fishy.

An audit qualification is a direct message that the entity’s corporate governance mechanisms are not the best, which could lead to other misdemeanours. So far, listed companies were submitting Form A or Form B to SEBI depending on whether the report was unmodified or modified.

The circular

The latest circular asks companies with an unmodified opinion to file a declaration to this effect, instead of going through the monotonous routine of filing a form.

For audit reports with a modified opinion, a statement showing the impact of audit qualifications has to be filed with the stock exchanges. The management of the listed entity has the option to explain its views on the comments. Where the impact of the audit qualification is not quantified, the management makes an estimate or provides reasons if they are unable to do so. In both scenarios, the auditor reviews and give the comments.

In case of non-compliance, stock exchanges can take action against the entities and report to SEBI. The circular is applicable for audit reports filed on the financials for the year ended March 31, 2016.

The circular has come out a bit late since many large companies have already completed their obligations for March 31 — there is no clarity on whether these companies need to re-file.

The format that accompanies the circular requires disclosure of turnover, expenditure, net profit/loss, assets, liabilities and net worth. The shareholder gets these numbers anyway from other parts of the financial statements. Given that audit qualifications are lengthy and need some understanding, it is appropriate that SEBI asks companies to list out which items in the financial statements are impacted by the qualification and the quantity of impact.

Get real

The format requires a qualified opinion/disclaimer of opinion/adverse opinion to be reported. The buzzword in the auditing world these days is ‘professional skepticism’. The SEBI circular does not cover ‘emphasis of matter’ — this indicates the auditor wants to draw attention to certain areas where something could be amiss.

For instance, before Tesco restated its financial statements on incentives that were receivable from its suppliers, its auditors had made an emphasis of matter on the amount Tesco recognised as revenues.

Appropriate and timely disclosures are to be welcomed, but a disclosure for the purpose of ticking off one more box is meaningless. For listed companies, SEBI should focus on the quality of disclosures — other regulators have ensured that there is no lack of quantitative disclosures.

The writer is a chartered accountant

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Published on June 29, 2016
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