sitemapHome | Registration | Job Portal for CA's | Expert Exchange | Currency Converter | Post Matrimonial Ads | Post Property Ads
News shortcuts: From the Courts | News Headlines | VAT (Value Added Tax) | Placements & Empanelment | Various Acts & Rules | Latest Circulars | New Forms | Forex | Auditing | Direct Tax | Customs and Excise | ICAI | Corporate Law | Markets | Students | General | Mergers and Acquisitions | Continuing Prof. Edu. | Budget Extravaganza | Transfer Pricing | GST - Goods and Services Tax
Latest Expert Exchange
« Auditing »
 Supreme Court puts the spotlight on audit firms
 Auditing to be less of a burden as accountants embrace AI
 CAG's report on GST will be totally paperless
 Time Limit For Completion Of Assessment From The Date Of Special Auditor’s Report Under Income Tax Act, 1961
 Provisioning pertaining to Fraud Accounts
 Tax Audit Report (TAR) Certain exceptions and increased limits according to number of partners and considering nature of activity are desirable
 Cost Auditing Standards [ Cost Audit Documentation (102)] – Part-II
 Conference on Companies Act gets under way
 New bureau to dissolve state-run banks' power to choose auditors
 Foreign Exchange Management (Permissible Capital Account Transactions) (Fourth Amendment) Regulations, 2015
 ICAI forms 'prima facie' view on NSEL auditor

Rating is no substitute for an audit
September, 24th 2009

The quality of information plays an important role in the rating outcome. A credit rating agency, however, might make necessary adjustments to reported figures for arriving at the rating, feels D R Dogra, managing director of CARE, a full service rating company that offers a wide range of rating and grading services across sectors.

He tells ET that rating cannot be construed as a substitute for an exhaustive audit or a fraud detection exercise. Excerpts:

The credit crisis has exposed weaknesses in many financial intermediaries. How can rating agencies ensure their views are more accurate and unbiased?

Despite due diligence, there is always scope for improvement. Credit rating agencies (CRA) do not carry out a separate audit but takes cognisance of the information available from annual reports, submissions from management, secondary sources and opinions from lenders/ investors.

As such, the quality of information plays an important role in the rating outcome. A CRA, however, might make necessary adjustments to reported figures to rate a company.

Nonetheless, the same cannot be construed as a substitute for an exhaustive audit or a fraud detection exercise. In a wider perspective, CRAs could consider avoiding potential conflict of interest generated by having ancillary business along with ratings business. At CARE we have stopped undertaking any advisory business. All new ratings are assigned by external rating committee.

Are the rating agencies facing a crisis of confidence after the significant default on AAA rated structured debt? Is the call for more competition justified?

At this point, it is pertinent to mention the relative stability of structured product ratings in India. Increased competition can help only to a limited extent beyond which the law of diminishing returns applies.

There are already five Sebi recognised CRAs in India compared to four main-line agencies in the US. Competition is welcome but we should see that it does not lead to rating shopping.

Would increased regulatory oversight be the answer?
CRAs are already regulated and subject to greater scrutiny than most other opinion providers. Increased regulatory oversight is not a panacea. The entire financial system, including intermediaries, has to graduate towards greater transparency. Nevertheless, we welcome any regulation to improve the rating standards.

Conflict of interest with issuers paying for credit rating has been a subject of raging debate. Would investor paid or a government-funded model work in India?

If the ratings could be linked to the fees paid by the issuer, only AAAs would dominate the rating list. All accepted ratings are in the public domain and disseminated on the CRAs website.

Issuer-pays-model ensures that clients provide requisite information for the initial rating and especially during the surveillance. In the investor-pays model, it may be difficult for an investor to get requisite information from the issuer during the surveillance process.

Further, the issuer-pays model ensures that ratings are available to all lenders/investors. Conversely, in an investor-pays model, the investor may not want to share the rating outcome with others and there could be pressure to avoid downgrades to avoid mark-to-market losses for the investor.

The issuer-pays model has not prevented these downgrades in the past one year, downgrades have outnumbered upgrades. Thus, the entire debate is misplaced.

Mandatory IPO grading has been criticised, as it is based on parameters such a short-term price performance. Are these investor concerns misplaced?
Investment decisions tend to be governed by the risk-return relationship and risk tolerance of an investor. Besides, valuation also plays an important role in determining the attractiveness of an investment proposition. IPO grading, being focused on the relative fundamentals, does not comment on the above.

It has to be necessarily seen as an opinion, which should be juxtaposed against the aforementioned factors like risk-return principle and risk tolerance of an investor.

Also, the short-term share performance is largely driven by market sentiments and not by long-term fundamentals. It should not be seen as an end in itself. It is too early to see the impact of IPO grading as it is hardly two years old. Some of the graded entities do not have even a one-year listing record.

Home | About Us | Terms and Conditions | Contact Us
Copyright 2018 CAinINDIA All Right Reserved.
Designed and Developed by Binarysoft Technologies Pvt. Ltd.
Software Development Software Programming Software Engineering Custom Software Development Requirement Based Software Development Software Solutions Software Serv

Transfer Pricing | International Taxation | Business Consulting | Corporate Compliance and Consulting | Assurance and Risk Advisory | Indirect Taxes | Direct Taxes | Transaction Advisory | Regular Compliance and Reporting | Tax Assessments | International Taxation Advisory | Capital Structuring | Withholding tax advisory | Expatriate Tax Reporting | Litigation | Badges | Club Badges | Seals | Military Insignias | Emblems | Family Crest | Software Development India | Software Development Company | SEO Company | Web Application Development | MLM Software | MLM Solutions