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Sebi Seeks Changes in Companies Act

The government is considering an amendment in the Companies Act to support a recent notification by the Indian capital markets regulator Sebi that proposes to penalise companies saddled with adverse auditor remarks.

Sebi has initiated a dialogue with the Ministry of Corporate Affairs (MCA) on bringing in changes in the Act with respect to provisions relating to restatement of financial accounts of listed companies that is now considered mandatory if the auditor has a different opinion, said two persons directly involved in the issue.

"It is acknowledged that an amendment to the (Companies) Act and to the Listing Agreement is essential for implementing the (Sebi's) notification on restatement of financial accounts," said one of the two persons. "That process has already started," he added.

While changes in the Listing Agreement can be initiated directly by Sebi, amendments to the Companies Act can only be proposed by MCA. The changes will have to be ratified by the Parliamentary Standing Committee, which is currently studying the proposed Companies Bill of 2011.

Under the Bill, MCA allows for restatement of accounts only on the back of an approved order by a competent court or tribunal, if it is found that the earlier accounts were prepared in fraudulent manner or if financial statements are not reliable due to mismanagement of affairs.

Restatement is also permissible when the directors believe that the company's previously issued financial statement did not comply with the reporting requirement of the Companies Bill 2011. On June 26, Sebi notified that annual accounts of companies that carry a qualification by their auditors will have to go for a restatement.

The notification said all such audit qualifications will have to be mentioned in a form accompanying the annual audit reports filed by listed entities with exchanges. The exchanges will then report the significant qualifications to Sebi's Qualified Audit Report Review Committee, which in turn, will refer the qualification to ICAI's Financial Reporting Review Board (FRRB) for an opinion on whether the qualifications are justified.

If FRRB justifies the qualifications, then Sebi may ask for restatement of accounts. Depending on the severity of the situation, Sebi may even consider penalties and punishment.

While Sebi's move is widely considered positive, it needs to be backed by the Act, since a company's financial account is considered to be a statutory statement. Any attempt to re-issue such accounts can only be done through the provisions of the Companies Act as India does not have the concept of restatement of accounts.

The regulator can set the ball rolling as its move is seen as an up gradation of the Act. "Sebi can always prescribe a higher standard compared to what is set by the Companies Act so long as it doesn't contradict statutory provisions of the Act," said Sandeep Parekh, founder of Finsec Law Advisors and a former executive director with Sebi.

Indian companies got first hand experience of restatement of accounts when software major Satyam Computer Services, now renamed Mahindra Satyam, was forced by Sebi to re-issue its financial statements for seven years as part of investigations to determine fraudulent practices carried out by Satyam's former management. However, Satyam's restatement was a one-off affair. To apply it widely would need the backing of the Act, say auditors.

"The Sebi notification is not clear whether the restated financial statements will have to be filed with the ministry of corporate affairs under the statutory provisions of the Companies Act.

Currently, statutory financial statements once filed cannot be restated, except for certain very rare situations," said Jamil Khatri, global head of accounting advisory at KPMG. The government had mandated KPMG and Deloitte to restate the accounts of Mahindra Satyam.

Khatri said that appropriate amendments may need to be made to the Companies Act and the accounting standards issued by the ICAI. Similarly, guidance may need to be provided under the auditing standards for audit of such restated financial statements.

Economic Times, New Delhi, 17-07-2012