A Securities & Exchange Board of India (Sebi) panel has recommended rotation of audit partners, selection of the chief financial officer by a companys audit committee and standardisation of earnings disclosure, in an attempt to prevent another accounting scandal such as Satyam Computer. ( Watch )
The committee has also proposed that companies publish their balance sheets, which show the assets and liabilities, halfyearly , against the present annual system. This would help investors know the companys solvency position, instead of just the profitability which comes out in quarterly results. The committee has invited comments and suggestions on these proposals before a final recommendation.
The Sebi Committee on Disclosures and Accounting Standards (SCODA), made these recommendations after B Ramalinga Raju, the promoter of the then fourthlargest software company Satyam Computer Services, in January said he had falsified accounts of about a billion dollars. That led to charges of lack of transparency, a flurry of investor suits in the US and accusations that independent directors had failed in their duty to protect investors. Probe by various agencies, including Sebi, is on.
New financial reporting norms
A longer association between a particular audit firm and a listed entity may lead to complacency and defeat the true sense of independence of the auditors, the panel said. But mandatory rotation of firms may not be practical by all companies, it said without detailing. Hence, it recommends mandatory rotation of partners every five years and suggests the audit committee be held responsible for the independence of audit firms and partners.
In the case of Satyam, PricewaterhouseCoopers had been the audit firm for many years and its partners S Gopalakrishnan and Srinivas Talluri have been signing the accounts. All are under probe for their role in the Satyam accounting scandal by differenc agencies.
The role of the audit committee should be only to the extent of expressing its opinion about the appointment, said RS Loona, managing partner of Alliance Corporate Lawyers and former executive director (law) at Sebi adding the appointment should be done by the board.
Some lawyers believe the focus on the audit committe is to reduce fears of some individuals who have either quit, or avoid becoming independent directors in companies after the Satyam episode. The committee has also recommended streamlining the submission of financial results and reduce the period for their submission to the stock exchanges.
There is still a need to try and standardise the extent and quality of reporting by various companies; some report audited, some reviewed and some unaudited and unreviewed results which may either be standalone or consolidated, said V.Venkataramanan, Director, accounting advisory services, KPMG. Introducing a more consistent and comparable format for quarterly reporting should be the medium term aim for listed companies in India, he said.
The panel proposed that companies should be allowed to voluntarily adopt International Financial Reporting Standards as a possible first step towards phased implementation of the new accounting practice starting April, 2011.