Source Business standard
RoC seeks auditor’s comments on Unitech balance sheet scrutiny
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PRESS TRUST OF INDIA
New Delhi, 11 March
The Registrar of Companies (RoC) is believed to have sought clarifications from the auditors of Unitech Ltd, following a technical scrutiny of the realty firms balance sheet for the financial year 2008-09.
As per the directions of the ministry of corporate affairs, the RoC conducted a technical scrutiny of the balance sheet for suspected violation of certain accounting standards.
The company officials did not offer any comments, despite repeated attempts.
However, sources said the balance sheet scrutiny prima facie showed violations to certain accounting standards, and Unitechs statutory auditors during 2008-09 have been asked to furnish their comments regarding the same.
In a communication late last month, the RoC has informed the corporate affairs secretary about the matter, while providing a status report on other issues that came to light during the balance sheet scrutiny. The auditors had not disclosed certain non-compliance in the Auditors Report, although the company was found not to have complied with certain accounting standards.
In their status report, the RoC has told the ministry that matter has been taken up with the auditors and their reply was awaited.
The scrutiny also showed that the gave loans to entities other than its subsidiaries in contravention of certain rules, but the RoC after re-examining the issue found that these entities were indeed subsidiaries of Unitech Ltd and therefore no rules were breached in this regard.
The RoC also scrutinised Unitechs purchase of 50 per cent stake in an entity named Shivalik Ventures Ltd, but is believed to have found no violations on that front.
In another matter concerning utilisation of funds worth ~200 crore raised as a loan from LIC, the ministry had asked RoC to find whether the money was utilised as per the loan agreement. The matter was referred to LIC late in January.
Sources said the balance sheet scrutinyprima facie showed violations to certain accounting standards
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LEGAL DIGEST
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VAT on tendu leaves sentforreview
The Supreme Court has set aside the judgments of the Chhattisgarh and Madhya Pradesh High Courts and allowed tendu-leaves traders to file their returns before the VAT assessing authority who shall dispose of the matters within two months. The Minor Forest Product (Trading & Development) Co-operative Federation Ltd had initiated the tender process for sale of Tendu leaves. One of the conditions was that the bidder, whose bid is accepted, has to remit the taxes under the VAT Act to the state government. Several firms which were successful bidders were asked to pay the tax. They moved the high courts asking the respective revenue departments to treat the sales as inter-state sale and, therefore, not exigible for the levy. The high courts dismissed their petitions, without going into the nature of the transactions. They appealed to the Supreme Court in a batch, led by M/s Zunaid Enterprises vs State. The Supreme Court stated that the assessing authority should have decided the factual aspect and not the high courts. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Medicamentordetergents?
The Supreme Court has dismissed the appeal of the Commissioner of Central Excise and upheld the view of the tribunal in its dispute with M/s Wockhart Life Sciences Ltd. In this case, the controversy was over whether the Povidone Iodine Cleansing Solution USP and Wokadine Surgical Scrub were medicaments or detergents for the purpose of duty. The firm argued that they were of medical use while the revenue authorities maintained that they were detergents. The tribunal and the court ruled that the goods were medicaments. The judgment said: “They are used by the surgeons for the purpose of cleaning or de-germing their hands and scrubbing the surface of the skin of the patient before that portion is operated upon. The purpose is to prevent the infection or disease. Therefore, the product in question can be safely classified as a medicament.” >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Curbs on mining leases The Supreme Court has ordered that leases of minor minerals, including their renewal for an area of less than five hectares, be granted by the states/Union territories only after getting environmental clearance from the Ministry of Environment and Forest. In its interim order in the case, Deepak Kumar vs state of Haryana, the court further asked the Centre to bring into force the Minor Minerals Conservation and Development Rules 2010 at the earliest. The court regretted that Haryana and various other states have not so far implemented the recommendations of the ministry or the guidelines issued by the Ministry of Mines before publishing auction notices granting short-term permits for minor mineral boulders, gravel and sand in the riverbeds and elsewhere. The states were asked to follow the ministry’s guidelines to protect environment, while at the same time not affecting infrastructure activities. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Injunction on foreign proceedings
The Delhi High Court has granted an injunction in favour of the Union of India and against Videocon Industries Ltd in a dispute involving the jurisdiction of the English court while the issues have purportedly been decided by the Supreme Court of India. The government wanted to restrain the firm from proceeding with its claim before the High Court of Justice, Queen’s Bench Division, Commercial Court, London. The origin of the dispute under arbitration was a production sharing contract between the Ministry of Petroleum and Natural Gas and a consortium of four companies consisting of ONGC, Videocon Petroleum Ltd and others. While allowing the application of the government, the high court stated that “the integrity of the proceedings before the Supreme Court of India, which culminated in the final judgment and order dated May 11, 2011 must necessarily be protected.” The court further stated that it would not be fair to compel the government to pursue a matter in a foreign country when the Supreme Court has held in favour of it. That would amount to “perpetuating injustice and possibly result in conflicting judgments of two courts causing significant harm to the arbitration proceedings and delaying the same for an indefinite period of time, possibly resulting in their abrupt termination.”
MJ ANTONY
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Source Business Line
Case for stimulus to auditors
The role of an auditor has developed significantly over the years. With globalisation and increasing cross-border transactions, the stakeholders interested in the financial statements are no longer restricted to a specific country. A recent survey of investment professionals by a large accounting firm in the UK has shown that ‘a clean audit report' is a one of the significant factors considered while making investment decisions.
Given the state of the financial markets and the need for stronger financial reporting, it is the right time to explore the possibilities of improving the transparency of the scope, process and decision-making involved in an audit.
The Companies Bill, 2011(Bill) has made significant strides in this area by making changes to existing provisions and incorporating new requirements which are sure to go a long way in shaping the future of the audit profession in the country.
Auditor Independence
Independence of an auditor from the company that he is appointed in is of crucial importance in ensuring that there is objectivity and credibility in the auditors' reporting. The Bill has now introduced the concept of rotation of auditors — in case of listed companies it would be mandatory to rotate auditors — every five years in case of an individual and every 10 years in case of a firm with a uniform cooling off period of five years in both cases.
Rotation of audit firms and audit partners is currently a topic which is being discussed around the world, particularly in the light of the proposed legislation being considered by the European Commission and Concept Release on Auditor Independence and Audit Firm Rotation by Public Company Accounting Oversight Board (PCAOB ) in the US.
However, while almost all the existing regulations require audit partner rotation, there are hardly a few jurisdictions (the EU and the US, not being one of them), which have implemented audit firm rotation.
There are stringent requirements with regard to appointment of an auditor even currently both under the ICAI requirements as well as the Companies Act, 1956, with the guidance of the Institute of Chartered Accountants of India (ICAI) already pegged to international standards since it is on the lines of the Code of Ethics issued by the International Federation of Accountants.
Audit firm rotation, if implemented, has several far-reaching implications, in particular increasing the burden on the company by going through the exercise of evaluating and hiring a new auditor/audit firm every few years.
Additionally, where a company has global operations, including an Indian company with overseas operations, this could lead to an operational nightmare if there are different auditors auditing different components owing to varying audit firm rotation policies across territories.
Regulating the auditors
This brings us to the next issue of how are the auditors regulated and who regulates them. Audit has always been a highly regulated profession and primarily regulated by the ICAI. The Bill now seeks to introduce a new regulator — the National Regulatory and Financial Authority (NFRA) as well as provide substantial powers to the Tribunal. The powers and responsibilities of the NFRA are currently exercised by the ICAI.
Creating newer and more stringent laws will essentially require enforcing and monitoring measures to be implemented.
While the rationale of creating a new body to meet this end could be argued either ways, the fact that the roles and powers of the regulators should be rationalised such that there are no conflicts, cannot be ignored.
Extent of responsibility
The layman's inference of an audit is more often that a sign off by an auditor is proof enough of the company's ‘all round' well being.
This mindset has been fostered over the years and is one that is hard to let go off. It may, in fact, surprise many that the auditor only looks at 12 months from the date of the financial statements to assess the ‘going concern' assumption of the company.
Certain provisions of the Bill seem to further endorse this view by making the auditor responsible for reporting any and every aspect that could potentially go wrong with the company.
Another significant aspect of the Bill is that the scope and extent of auditor's liability has been substantially enhanced. The auditor is not only exposed to various new forms of liabilities, but the existing ones have been made much harsher.
The provisions of the Bill imply that irrespective of the nature of contravention, all contraventions by an auditor are liable for penalty.
There is no defence of default not being committing willfully, as in the existing Companies Act, 1956. Further, the liability of the auditor has been extended to any person who reads the financial statements of the company. The drastic repercussions proposed in the Bill appear to be clearly disproportionate to the duties of an auditor.
What the future holds
The reforms proposed reflect the deliberations across the world around audit policy. Apart from the ‘regulatory' debates, there are also discussions relating to the need of the investor community requiring auditors to report on newer aspects such as non-GAAP measures, industry metrics, and so on.
While such debates are still a long way off in India, the proposals in the Bill are significant enough to change the face of the auditing profession in the coming years.
However, the law makers and the regulators should ensure that they do not lose sight of the fact that an auditor never was nor will he ever be responsible for the functioning or the ‘good' performance of the company.
Having said that, the laws (and enforcement) relating to auditor independence and unambiguous and credible reporting by the auditor, are of paramount importance.
Given the relevance of the auditing profession and the fact that audit and auditors are an indispensable part of the corporate world, regulators must think of providing stimulus to the audit profession to empower them to face the ever increasing challenges rather than stifling them with extreme and excessive consequences
The Companies Bill may come down harshly on the auditors, increasing the extent of their liabilities.
(This article was published in the Business Line print edition dated March 12.2012
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Lease accounting and IFRS
Accounting for leases is expected to change fundamentally if the current proposals in the Exposure Draft on Leases see the light of the day.
Both the International Accounting Standards Board and the US Financial Accounting Standards Board released the Exposure Draft on Leases in August 2010 and the comment period ended on 15 December, 2010.
Since then many expert groups have expressed concern over the proposals. To receive more comments on it, both the boards have decided to re-expose the leasing project.
A recent report issued by Chang & Adams Consulting warns that the current proposals could have an adverse impact on US companies.
Significant departure
So what is this gloom and doom all about? Probably, the most fundamental change is the departure from the operating-lease model, which exists in the generally accepted accounting standards.
While operating leases are usually a shorter term and show a straight-line rental income or expense, depending on whether an entity is the lessor or lessee, finance leases (referred to as capital leases under US GAAP) are usually for a longer term, when compared to the life of the asset, and are treated as if the assets are owned by the lessee.
A significant portion of premises and equipment rental agreements in the corporate sector are operating leases, which results in the lessee simply accounting for the rental expense.
The Exposure Draft proposes that almost all leases should be treated like a finance lease, and therefore need to be recorded on the balance sheet. Thus this would lead to a significant reclassification on the balance sheets. Hence, companies having leased premises or equipment would be expected to have higher liabilities on their balance sheets because they would recognise an obligation towards such leases with a corresponding right-of-use asset.
This is likely to also increase the debt-to-equity ratios of such companies, and therefore impact their ability to raise finance. The respondents to the Exposure Draft also envisage that the proposals are too complex to implement.
Poor estimates
On the other hand, the boards argue that the present lease accounting standards have problems. Both US Generally Accepted Accounting Principles or GAAP and International Financial Reporting Standards have two lease categories, finance and operating leases.
Since lessees, under operating leases, simply account for the lease payments as expense over the term of the lease, investors have to estimate the effect of operating leases on financial leverage and earnings.
According to the boards, these adjustments are often estimates without robust support. Therefore, to enhance the quality of reporting and prevent the need for such arbitrary adjustments by investors, the proposed model is more consistent.
Something to cheer about is that leases with terms less than 12 months are categorised as short-term and are excluded from the scope of such asset and liability recognition.
However, the caution is that structuring of such leases for shorter terms appended with options to extend or renew may not meet the definition of a short-term lease.
Further, the boards have also tentatively agreed to exclude lessors and owners of investment properties from the applicability of the proposal.
The boards have agreed to reissue the Exposure Draft in the second quarter of 2012. It seems certain that the rule makers would have to consider carefully the concerns raised by the industry and businesses before the final standard is released for adoption.
The Exposure Draft on Leases proposes that almost all leases be treated like finance lease.
Better bang for every audit buck
Investors rely on auditors to better understand the financial health of companies.
The financial crisis proved the significance of the role of auditors but, at the same time, increased the scrutiny and interest that comes with it. Much of the attention has focused on competition and independence, but auditor reporting has been a lightning rod for debate around reform.
As a profession, we have not done a good job of explaining what an audit is, so we can hardly complain if it is not well understood.
What investors want?
Surveys consistently show that investors value the audit and the audit opinion but they also show that current auditor reports do not meet their needs as well as it could. Investors greatly value the auditor's opinion on financial statements, but they would like more informative reporting — greater insight into the entity's financial reporting, as well as assurance on other information or matters not within the scope of today's financial statement audit.
The most common demand by many investors is that auditors should provide greater insight into judgments that the management makes in preparing financial statements, going concern assumption and risks of material misstatement. Insights into above areas can be achieved by various means. For example, disclosures made by the management can be signposted by emphasising matter paragraphs and audit committee reporting can be enhanced.
evolved reporting model
From among the information that companies publish, the audit focuses on reporting at a time on just one element — the financial statements. To better meet the needs of market-based systems, there is a need to reform the overall corporate reporting model.
As corporate reporting evolves, a more comprehensive assurance model can further enhance the relevance and value of information for the capital markets. This may potentially include opinions that cover other aspects of the entity's reporting, such as reporting on non-GAAP financial information, risk, internal controls, governance, and social and environmental impacts.
Key focus areas
Further, most of the investors are under the misapprehension that information published in preliminary statements (example, quarterly results) is always audited. They say that these statements drive the market hence they would like to see a formal statement of assurance being attached to such statements.
Maintain orimprove audit quality and enhance the value of audit to users;
increase thereliability of information companies provide in public reports;
maintain orenhance the effectiveness of auditor interactions with those charged with governance (example, audit committees and management);
ensure auditorreporting is sufficiently similar to enable comparisons of the underlying information between different companies; and
provide greaterinsight on the audit but avoid the auditor being the original source of factual data about the entity.
(This article was published in the Business Line print edition dated March 12, 2012
The cutting edge to internal audit
Vidya Rajarao
The multi-dimensional functions of an internal auditor raise a question with regard to conducting investigations as a part of addressing fraud risk. In sophisticated and large organisations, internal auditor may don the role of an investigator but what should be the point of hand-off to forensic investigators and legal counsel? The answer depends mainly on two factors — management philosophy, skill sets and experience of the internal auditor.
Management philosophy
According to the PwC's Global Economic Crime Survey, 2009 – 54 per cent of the respondents believed that one of the top factors contributing to higher opportunities of risk of fraud in India is that internal audit is being asked to do more work and/or with less staff. There have also been instances, when internal audit function has faced budget constraints which may stall the process of investigating fraud issues further. This may put the company at greater risks.
Skills of an internal auditor
The point of hand-off is determined by internal auditors' skill set to continue to carry on with a fraud investigation. Any investigation has two integral components — examining documents and interrogating the suspects to determine and validate facts. An internal auditor may have the skills to examine documents meticulously; however, an interrogation requires tact, an understanding of human behaviour and experience. Hence it is advisable that the process of further investigation involving interrogation is conducted by a forensic accountant.
Key responsibility areas
Over and above the routine work, the key responsibility areas of an internal auditor include cost reduction and value addition. The value addition goal depends upon the internal auditor's interpersonal relationships in the organisation. During a fraud investigation, an internal auditor may jeopardise his interpersonal relationships which, as a consequence, may affect his value-addition goals.
Given the increased scope and complexity of the internal audit function, forensic accountant investigators can provide the necessary edge to carry out further investigations in a judicial manner.
(This article was published in the Business Line print edition dated March 12, 2012)
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