Sebi panel favours half-yearly auditing

Sebi panel favours half-yearly auditing

Mumbai: Wiser after the Rs7,136 crore Satyam Computer Services Ltd fraud, a committee of capital market regulator Securities and Exchange Board of India, or Sebi, on Monday recommended a slew of measures to make financial reporting by listed firms more transparent and less confusing for investors.

The Sebi panel on disclosure and accounting standards has suggested that listed firms must submit audited balance sheets every six months against the current practice of doing it once a year.

“...A more frequent disclosure of the asset-liability position of companies would assist the shareholders in assessing the financial health of the companies, thereby helping them in making informed investment decisions," the panel said in a discussion paper on the Sebi website.

The paper is open for public comments till 25 September.

In one of the biggest accounting scandals in Indian corporate history, B. Ramalinga Raju, founder and former chairman of Satyam, confessed on 7 January to having fudged the company’s account books to the tune of Rs7,136 crore over several years.

The panel is also in favour of reducing the time available for companies to file their audited financial results from 60 days to 45 days for each of the first three quarters of a fiscal year. For the last quarter and full year, firms can continue to follow the 60-day norm.

The audited consolidated annual earnings need to be reported within 60 days instead of the earlier 90.

“When companies report unaudited numbers, in many cases, a lot of variation is found when final numbers are released at the end of the year and investors often have an annual surprise. Half-yearly audit will reduce such surprises to a great extent," said Suresh Surana, director, Astute Consulting and Business Services Pvt. Ltd, a Mumbai-based consulting firm.

While it is good news for investors, for auditors it will mean more work and more stringent timelines, he said.

The Sebi panel has also suggested that from now on, companies with subsidiaries should report only consolidated earnings and such reports should give details about turnover, profit after tax and profit before tax on a stand-alone basis as a footnote. Companies now report both stand-alone and consolidated results, often confusing investors. Many firms with subsidiaries file their consolidated results on the exchanges long after they file their stand-alone numbers.

“In the light of the various options given to listed entities, it was seen that several categories of financial results in respect of a particular period for an entity were disseminated in public domain, which tends to confuse the investors at large," the committee said.

At the end of the last quarter, listed firms have an option to either submit un-audited last quarter financial results within one month from the end of the last quarter or go for consolidated audited results for the full year after 90 days.

So, if a firm opts to submit annual audited results in lieu of last quarter financial results, there is no information available in the public domain about its financials for about five months or more, and this could make the shares of the firm prone to insider trading, the panel has pointed out.

It has made the audit committee of a company responsible for ensuring that the chief financial officer (CFO) of a company “has the necessary accounting or related financial management expertise".

Surana of Astute Consulting said the role of CFOs has become very demanding and will be more difficult with the international financial reporting standards coming into effect from April 2011.

Following the Satyam scam, its chief financial officer Srinivas Vadlamani along with Ramalinga Raju, his brother and Satyam’s former managing director B. Rama Raju, and two Price Waterhouse auditors Srinivas Talluri and S. Gopalakrishnan were arrested. They continue to be in jail even as investigations by various agencies, including Sebi and the Central Bureau of Investigation, have been on.

According to B.K. Vatsaraj, partner, Vatsaraj and Co., a Mumbai-based accountancy firm, the recommendations will increase transparency and firms which have too many subsidiaries and operate in different countries may prefer to report stand-alone results first.