SEBI also asked stock exchanges to conduct immediate scrutiny of the audit issues highlighted in these documents and seek necessary clarifications from the company
Mumbai: Tightening noose around companies trying to hide issues raised by auditors in their voluminous annual reports, market watchdog Securities and Exchange Board of India (SEBI) has asked all listed firms to submit separate documents for adverse observations made against them, reports PTI.
The regulator has also asked the stock exchanges to conduct immediate scrutiny of the issues highlighted in these documents and seek necessary clarifications from the concerned companies about the observations made by auditors.
If the auditors' observations are found to be serious, the SEBI can also ask the companies to restate financial accounts and to inform shareholders about it, the regulator said in a circular.
As per the current regulations, all listed companies are required to submit the copies of annual reports containing audited financial statements to the stock exchanges.
However, many serious issues about the companies' accounts, including possible cases of fraud, can go unnoticed even if they have been flagged off by auditors, as such observations are generally buried deep inside the bulky documents like annual reports.
To enhance the quality of financial reporting by listed companies, SEBI said it has "now decided to put in place a system to monitor the audit qualifications contained in the audit report accompanying the audited annual financial statements submitted by listed companies".
Accordingly, listed companies will now be required to submit two separate forms along with copies of annual reports submitted to stock exchanges.
Form A will detail the 'Unqualified/Matter of Emphasis Report', and the Form B will comprise of 'Qualified/ Subject To/Except for Audit Report'.
'Qualifications' made by auditors are the issues or observations flagged off by them about various aspects of the company's financials.
At times, the auditors may not make any 'qualifications', but flag off certain issues as 'matter of emphasis', while there could also be issues 'subject to' various factors and issues that might not be worth any concerns 'except for' certain developments.
These various kinds of observations are made in auditor reports for further action by the management of the concerned company.
The two forms, A and B, would be required to be signed by the CEO/Managing Director, Chief Financial Officer, Auditor and Chairman of the Audit Committee.
These forms would have to contain information about relevant notes in the annual financial statements, the response of management to the qualifications and comments of the Board/Chair of the Audit Committee.
Among other details, these forms would have details like frequency of auditor observations, whether it has been made for the first time or is repetitive in nature and for how long such comments were being made.
Besides, the companies would be required to give gist of qualifications/headings (along with reference to relevant page numbers of the annual reports) and the management's response.
Further, the forms would be required to contain additional comments from the board and audit committee about nature of the qualification, including materiality, agreement /disagreement on the qualification, steps taken to resolve the qualification.
The new guidelines would be applicable to all annual audited financial results submitted by the companies for the period ending on or after 31 December 2012.
In its latest circular, SEBI has also fixed deadlines for compliance at the level of the companies and stock exchanges for further action on issues raised in these new forms.
According to the market regulator, stock exchanges should carry out preliminary scrutiny of reports that would also include the bourses seeking necessary explanation from the listed company.
"Stock exchanges shall also consult one other for distributing the work in case shares of the listed company concerned are listed on more than one stock exchange," the circular said.
If necessary, the bourses can refer the cases to SEBI for further examination.
SEBI has also set up the 'Qualified Audit Review Committee', having representatives from Institute of Chartered Accountants of India (ICAI) and stock exchanges, among others.
The panel would review the cases received from stock exchanges and guide SEBI in processing the qualified annual audit reports referred by them.
In case the committee finds that an audit qualification is significant and the explanation given by the concerned company is unsatisfactory, it may be referred to the Financial Reporting Review Board of ICAI (ICAI-FRRB).
It will check whether the qualification is justified or requires restatement of the books of accounts of the listed company.
"If ICAI-FRRB opines that an audit qualification is justified, SEBI may ask the listed company concerned to restate its books of accounts in compliance with the statutory requirements and inform its shareholders about the same by making an announcement to the stock exchanges," the circular noted.
In case, a listed company is asked to restate its financial results, it will have to be done within two months from the date of letter of communication to the concerned entity.