Emphasis of Matter: Auditors' new way to flag off risks

To draw investors' attention towards potential financial and litigation risks at companies, the auditors have adopted a new practice of flagging off 'Emphasis of Matter' observations in their audit reports. 

Such 'Emphasis of Matter' observations are in addition to the usual accounting issues mentioned by the auditors in the companies' financial accounts and such references find a place in the latest fiscal annual reports of at least 11 major companies, including six Tata group firms. 

These references mainly pertain to material uncertainties arising out of financial and litigation issues before the company, and are mentioned by the auditors after discussions with the firm's management and internal audit committee. 

An analysis of the latest fiscal (2012-13) annual reports of major companies shows that the auditors of at least ten large firms have an 'Emphasis of Matter' section in their audit reports. 

These include six Tata entities -- Tata Steel, Tata Power, Tata Motors, The Indian Hotels Company, Tata Global Beverages and Voltas -- as also giants like DLF, JSW Energy, J K Cements, Cairn India and GVK Power & Infrastructure. 

According to experts, the 'Emphasis of Matter' section has become visible in the latest annual reports because of a new reporting format being adopted by the auditors. 

"The 'Emphasis of Matter' highlights material uncertainties that could impact the company's financial statements, which require to be brought to the attention of the user and is not to be seen as a qualification," Deloitte Haskins & Sells Managing Partner (Audit) N Venkatram told PTI. 

Generally, the matters highlighted include appropriateness of the 'going concern' basis due to shortfall in future cash flows to meet loan repayments. Besides, uncertainties such as ongoing litigation are also brought to notice, Venkatram said. 

As per accounting regulator ICAI, the 'Emphasis of Matter' paragraph in the auditor's report refers to a matter appropriately presented or disclosed in the financial statements that in the auditor's judgement is fundamental to users' understanding of the financial statements. 

"The 'Emphasis of Matter' is included in the auditors' report after discussions with the company's audit committee, as well as management. This does enable timely and improved auditor communications with the audit committee," Venkatram said. (Economic Times)