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Higher threshold set for mandatory audit of transaction
January, 20th 2011

The government is set to raise the threshold for independent verification of corporate transactions in the Companies Bill , diluting a proposal it made before a key Parliamentary panel.

The threshold would now be fixed at 1% of a company's annual turnover as against 5 lakh suggested by the corporate affairs ministry before the Parliamentary Standing committee on finance.

This means auditors would have to verify all transactions above the 1% threshold with counter parties, such as banks, to ensure their authenticity.

"The proposal to raise the threshold of transactions that would require an independent verification from auditors merit consideration," said a senior official in the ministry of corporate affairs, adding that representation in this regard has been made by the industry.

As of now, an audit is primarily a review of a company's financial statement to establish its truth and fairness. Auditors usually do not go into the veracity of the numbers.

The move to get the transactions independently verified is aimed at checking corporate frauds, like the one involving Satyam Computer Services (now called Mahindra Satyam).

The Institute of Chartered Accountants of India (ICAI) had opposed the 5 lakh threshold saying it would make audits cumbersome. The accounting regulator had argued that almost every transaction of a large company is above this limit.

The relaxation, however, comes with a rider. The government would prescribe a stringent set of internal audit norms which companies would be required to follow. The Bill would also give 'audit standards' a statutory recognition, meaning a violation would attract penal action. Currently, accounting standards do not have the force of law.

The proposal has received mixed reactions, although most auditors agree that the move is in the right direction. "It (the move) might enhance confidence of public on the audited financial statements," said Chetan Desai, joint managing partner at audit firm Haribhakti & Co.

"The earlier proposal was not practical. 5 lakh limit is very low. In many large companies, there are several single transactions, which are more than such amount," Mr Desai said.

Some auditors, however, did not agree with the proposed change. They say that the process will involve exhaustive investigation of transactions and that waiting for third party confirmations could lead to huge delay in the audit process. They also argue that the rule would increase audit costs.

"Putting such a requirement as part of the law will harm the very interest of the shareholders, whom the proposal seeks to protect," said N Venkataram, partner, Deloitte Haskins & Sells , a leading audit firm in the country.

Companies agree with the auditors.

"I don't think it is a practical suggestion," said K Sridharan, chief financial officer at Ashok Leyland . "It will make the audit process more cumbersome," he said.

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