Return
to Story Page
To print: Select File and then Print from your
browser's menu
Jayant Thakur
A disturbing trend found recently is of several companies, many of them large, reporting profits when, if the inappropriate accounting treatment as adversely commented upon by the auditors is considered, there is actually a loss. The temptations and the implications of such window-dressing are not difficult to see. The company is shown to be a profit-making one to its shareholders, the public (which would include potential investors), its workers, depositors and, at least from a psychological point of view, lenders and analysts. The company may also avoid being a "sick company" and thus be able to avoid the clutches of the Body for Industrial and Financial Reconstruction (BIFR). There may also be some tax benefits. What is worse, however, is that the company may pay dividends out of such paper profits putting all who have a stake in the company at risk of loss.
What is the duty of the management and, more specifically, the board of directors, with regard to proper and fair preparation and presentation ofaccounts? Is this only the auditor's duty? Let us see what the Comapnies Act, 1956, says. Section 209(3) requires the company to prepare its books of accounts so as to reflect a true and fair view of its affairs. Section 211 requires that the balance sheet and profit and loss account shall give a true and fair view of its state of affairs and the profit/loss respectively.
Section 215 requires that such statements shall be approved by the board before their submission to the auditors for their report thereon and these also have to be signed on behalf of the board by the specified directors. Section 227 requires the auditors to report on, amongst others, whether these statements give a true and fair view. If the auditor gives an adverse remark, reservation or qualification, section 217(3) requires the board to give in its report "fullest information and explanation" on these.
To summarise, though it may appear that both the board of directors and the auditors are required to consider whether the accountsshow a true and fair view, it is clear that the primary responsibility for this is of the board, while to report on it is of the auditors. The intention of making this fine distinction is that merely by replying the auditor's qualifications, the defects in the accounts are not made good nor is the responsibility of the board thereby over.
Understandably, the board and auditors may have a honest difference of opinion, or, the board may have a genuine reason to adopt a particular method of accounting or policy, while the auditor has to give an adverse remark because of technical or legal reasons. At times, the auditor may make an adverse remark because an accounting standard which, though is not legally binding on a company, is not followed. Here, the company may be legally right though one must note that the accounting standard does represent a set of appropriate accounting policies and non-conformity should certainly raise a question mark.
One has also to appreciate that the auditor would not qualifymerely because the board is following an acceptable accounting policy while he feels that another alternative and equally acceptable accounting policy could have been followed. In other words, if, say, an accounting standard permits two alternative methods of treatment of an item, the auditor will not insist that only a particular method should be followed, or else he will qualify.
What are the remedies to say, a shareholder, a depositor or other lenders, creditors, etc, if the company management prepares defective accounts? The act provides for fine or imprisonment of the person for violation of the requirements. To a prospective investor in a public issue, there are more stringent provisions, though these may not apply to persons acquiring shares from the stock exchange. Of course, action can also be taken under other statutes such as the Indian Penal Code for falsification of accounts, etc. But these are remedies that may arise when it may be too late. The provisions in the Companies Act need to befurther strengthened and better enforced. There also needs to be adverse remarks of the auditors, but there are better methods of inviting attention to them.
One way is to ensure that the auditor's report is mandatorily required to be given along with the accounts of a company. This would draw the attention of the person concerned to its contents. True, section 216 requires that the auditor's report has to be attached to the accounts, but a more emphatic statement along with making such non-attachment a severely punishable offence would be better. Secondly, a clear table should be given where each adverse remark or qualification of the auditor is given along with the corresponding explanation of the management. This will help incertain ways.
The reader will not have to go through the lengthy and, often, for the lay reader, incomprehendible, audit report searching for reservations. He will know the explanations, if any, of the management. Such a table should also be a mandatory attachment to the accountsas stated earlier. A concerted attempt should also be made to simplify and shorten the auditor's report and highlight the qualifications at one place. Finally, offence of inappropriate or misleading presentation of accounts should be made specifically a separate offence and, more importantly, enforced. These steps would help in improving corporate governance and revive the faith of investors in companies.
(The author is a Mumbai-based chartered accountant)
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
------------------------------------------------------------
This story was printed from Net Express located at http://www.expressindia.com. Net Express provides a portal to India, with news from The Indian Express and The Financial Express along with sites on travel and tourism, the entertainment industry, the power sector, the environment and much more.
------------------------------------------------------------