Govt may penalise companies saddled with adverse auditor remarks
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The government is considering an amendment in the Companies Act to support a recent notification by the Indian capital markets regulator Sebi that proposes to penalise companies saddled with adverse auditor remarks.
The Securities and Exchange Board of India (Sebi) has initiated a dialogue with the ministry of corporate affairs (MCA) on bringing in changes in the Act with respect to provisions relating to restatement of financial accounts of listed companies that is now considered mandatory if the auditor has a different opinion, said two persons directly involved in the issue.
"It is acknowledged that an amendment to the (Companies) Act and to the Listing Agreement is essential for implementing the (Sebi's ) notification on restatement of financial accounts," said one of the two persons. "That process has already started," he added.
While changes in the Listing Agreement can be initiated directly by Sebi, amendments to the Companies Act can only be proposed by the MCA. The changes will have to be ratified by the Parliamentary Standing Committee which is currently studying the proposed Companies Bill of 2011.
As per the Bill, the ministry of corporate affairs allows for restatement of accounts only on the back of an approved order by the competent court or Tribunal, if it is found that the earlier accounts were prepared in a 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. 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 accompanying the annual audit reports filed by listed entities. The exchanges will then report the significant qualifications to Sebi's Qualified Audit Report Review Committee, 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. While Sebi's move is widely considered positive , it needs to be backed by the Act, since a company's financial account is considered to be a statutory statement.
Any attempt to re-issue such accounts can only be done through the provisions of the Companies Act as India does not have the concept of restatement of accounts. The regulator can set the ball rolling as its move is seen as an upgradation of the Act.
"Sebi can always prescribe a higher standard compared to what is set by the Companies Act so long as it does not contradict statutory provisions of the Act," said Sandeep Parekh, founder of Finsec Law Advisors and a former executive director with Sebi. (Economic Times)
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