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SEBI, disclosures and frauds
September, 23rd 2009

SEBIs proposals on improving disclosure may, at best, help in spotting frauds after they happen. What we need are measures that will help in preventing them, says RAGHUVIR SRINIVASAN.

Eight months after the Satyam scandal broke, the Securities and Exchange Board of India (SEBI) seems to have finally decided that it is time it reviewed disclosure and financial reporting standards in the country. And so its Committee on Disclosures and Accounting Standards has come up with a set of proposals to streamline disclosure norms for listed companies.

A couple of the proposals, such as the one that will crash the time limit available for companies to disclose their quarterly results and the need for them to disclose audited balance sheet figures on a half-yearly basis, are welcome.

The Committee has shown touching faith in the ability and work of statutory auditors of companies despite the experience of Satyam which was audited by Price Waterhouse, a Big Four firm, no less. It has come out with proposals that increase the responsibility and work-load of auditors who run the risk of acquiring permanent resident status in their clients offices if the proposals are signed into law.

Quicker time to market

The most significant proposals though relate to time-lines for quarterly results. At present, companies have to declare unaudited results of their stand-alone operations within a month of the end of the concerned quarter; they have to follow it up with results subjected to a limited review by auditors within two months of the end of the quarter.

The new proposal slashes the time available for submitting results with a limited review report to 45 days from the end of the quarter. Also, companies will now have the choice of declaring audited results within the same time-frame. The same time limit applies to companies with subsidiaries that submit consolidated results. The question is: do we need audited reports at the end of every three months? Or are investors better off with unaudited results that are in their hands within 30 days of the end of the quarter?

Given the large number of listed companies and the practical limitations that audit firms face, it may be better to opt for unaudited results every quarter (declared within a month) and a full audited results copy filed with the exchanges within 60 days of the end of the financial year (presently 90 days).

Auditor constraints

Ask any big audit firm today and its partners would tell you about the manpower problems that they face due to the dwindling numbers of students who take up the chartered accountancy course. Called article clerks, these students form the backbone of the profession in its attest function and are the foot-soldiers who scour their clients books of accounts.

Now, why the CA profession faces this problem is a different story altogether. Suffice it to say that the audit firms could face practical problems in devoting staff in their clients offices for periods of up to two months every quarter.

If the comfort of the auditors stamp is really required, it may be a better option to go for half-yearly audited results. Auditors will anyway have to certify major balance-sheet items every six months if another of the SEBI Committees proposals is accepted. This can be converted into a full audit of the company leading to half-yearly audited accounts presented to shareholders. The quarters in-between, that is the first and the third, can make do with unaudited results disclosed.

Consolidated results

The Committee has proposed that companies with subsidiaries disclose consolidated results only with major stand-alone numbers such as turnover and profits before and after tax given as foot-notes. It may be better to suggest a simultaneous announcement of consolidated and stand-alone results as investors do need to know the full performance of the stand-alone entity.

For instance, in the case of Tata Motors 2008-09 results, the stand-alone entity shows a profitable operation while the consolidated one shows a loss. Investors who can read numbers may want to know the full extent of the stand-alone Tata Motors results as it is crucial in supporting the finances of the loss-making Jaguar Land Rover subsidiary.

Besides, as proposed, the Committee should crash the time available for companies to declare full-year audited results to 60 days (from 90 days now) while continuing with the 30-day limit if the company wishes to disclose unaudited full year results.

As it rightly points out, in the present regulations, there could be instances where investors remain in the dark about the companys performance for at least five months if the company chooses to declare audited results for the fourth quarter. This happens in the case of a number of prominent companies now, including some in the Sensex.

IFRS choice

On the issue of permitting companies to draw up their accounts using International Financial Reporting Standards (IFRS), which will become mandatory beginning 2011-12, SEBI should give all companies the option of adopting IFRS immediately rather than restricting such option to only those with overseas subsidiaries.

It is only fair that companies willing to shift gradually be given the choice; the reconciliation statement that they will present with their accounts will help investors in the transition phase.

Rotation of auditors

The Committees suggestion of rotation of partners of the audit firm every five years is probably aimed at curbing vested interests developing between a partner and his client. However, the suggestion would appear nave to those who understand how audit firms operate. The foot-soldiers who actually audit the records, which is the team of article clerks or audit assistants (who may be qualified chartered accountants), are the same irrespective of which partner signs the balance-sheet.

Again, vested interests typically develop between the firm and the client and not always the partner and client. That is the reason why Price Waterhouse is arraigned along with its partners, Mr Gopalakrishnan and Mr Srinivas Talluri, in the Satyam case. Actions such as rotation of auditors are merely cosmetic solutions. The SEBI should involve the Institute of Chartered Accountants of India (ICAI) while devising regulations to strengthen the audit function.

For its part, the ICAI should seriously look at evolving a code of conduct for its members employed in industry that penalises them for either signing, in their capacity as CFO, or assisting in the preparation of financial statements that they know are fraudulent.

At a larger level, the government should also consider framing a whistle-blower policy that encourages and protects employees who blow the whistle when they suspect a fraud in their company. The SEBI Committee proposals on disclosure may, at best, help in spotting frauds after they happen. What we need are measures that will help in preventing them and that can come only by a coordinated effort of the regulatory agencies, the government and the ICAI.

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