On June 26, Sebi notified that annual accounts of companies that carry a qualification by their auditors will have to go for a restatement.
The notification said all such audit qualifications will have to be mentioned in a form (Form A: ‘Unqualified’ / ‘Matter of Emphasis Report’ or Form B: ‘Qualified’ / ‘Subject To’ / ‘Except For Audit Report’) accompanying the annual audit reports filed by listed entities with exchanges. The exchanges will then report the significant qualifications to Sebi’s Qualified Audit Report Review Committee (QARC), which in turn, will refer the qualification to ICAI’s Financial Reporting Review Board (FRRB) for an opinion on whether the qualifications are justified.
If FRRB justifies the qualifications, then Sebi may ask for restatement of accounts. Depending on the severity of the situation, Sebi may even consider penalties and punishment.
The SEBI decision represents a significant change in the reporting framework for listed Indian companies and introduces the concept of ‘restatement’ in India. Prior to this decision, other than in Initial Public Offering (IPO) documents, restatements were permitted in extremely rare situations and were seldom seen in practice. In the case of IPO documents, the historical financial statements are required to be restated under the SEBI regulations to reflect audit qualifications, changes in policies and other specified matters relating to prior periods. Under the Companies Bill 2011, MCA allows for restatement of accounts only on the back of an approved order by a competent court or tribunal, if it is found that the earlier accounts were prepared in fraudulent manner or if financial statements are not reliable due to mismanagement of affairs. Restatement is also permissible when the directors believe that the company’s previously issued financial statement did not comply with the reporting requirement of the Companies Bill 2011.
Globally, restatements are more common and are done to correct errors identified in the financial statements or to reflect changes in accounting policies. Restatements that relate to errors are seen negatively by the investor community.
Further, in many jurisdictions such as the U.S., audit qualifications are not generally permitted to be included in filings by listed entities. Companies are required to either adjust the financial statements to avoid an audit qualification or to obtain pre-clearance approval on certain specific audit qualification from the staff of the Securities and Exchange Commission.
Questions that remain unanswered:
1. Within how much time frame the whole process will get completed? To get effective result of this process, the shortest time span is an important factor.
2. Whether the company will be given an opportunity of being heard or the remarks of directors given in directors report will be taken as base for making decision?
3. Is the opinion given by FRRB final? How much authority is to be given to FRRB?
4. What about the audit report with Adverse Opinion or Disclaimer of Opinion? Are they considered as part of Qualified report?
While SEBI’s move is considered a positive step to give investors true picture and provides a teeth to the qualified audit opinion, it is pertinent to watch how the review process is finalised and relevant changes are made in Companies Act and Listing Agreement.