Back A committee cannot turn a camel into a horse
For ages, the standard-setting scene was the exclusive preserve of the Institute. Naturally, it was not too happy when the NACAS (National Advisory Committee on Accounting Standards) entered the fray. It was in 1998 that Section 210A of the Companies Act empowered the Centre to constitute the new body to advise on the formulation and laying down of accounting policies and AS for adoption by companies.
Mr Irani is of the view that the above institutional mechanism may be retained, though the report is generous enough to take note of the `useful work' done by the ICAI "in prescribing operational standards of accounting to fill the gap till Accounting Standards could be notified." That should be as gratifying for the Institute as the announcement of a lifetime achievement award.
It is noteworthy that the Committee has favoured mandatory consolidation of holding-subsidiary companies' financial statements. With the growing trend of companies controlling non-corporate bodies such as firms, SPVs (special purpose vehicles) and so forth, the report puts the onus of record maintenance of those bodies onto the holding company. Yet, the suggestion to do away with subsidiary company statements in what the holding company mails to shareholders may not find favour among investors. On SPC (special purpose company), elsewhere the report argues for a different regime of depreciation.
The `e' edge
The emphasis on the use of electronic media for publishing financials, and for accessing records filed with the Registrars, is laudable. Similarly, the recommendations that financial statements should be permitted to be sent by electronic means, and be posted on the Web, can effect savings by reducing printing and postage expenses. However, the suggestion to harmonise the stipulation on the length of record retention with that of the Income Tax Act, seems to ignore the possibility of economic storage of archived data of many years using electronic media. Again, when accounts are computerised, it is debatable if there should be a minimum period for financial year, such as `three months' postulated by the report.
With very little happening in the realm of accounting philosophy to steer number-crunching onto an enhanced dimension beyond accrual and double-entry method, the committee is justified in its view that these must ``continue to be mandated''. Of greater import is the moving away of disclosure points from AS to Act/Rules. Mr Irani seems to be optimistic when proposing that any changes made in the AS could be factored in the Act/ Rules from time to time.
It is progressive thinking to let companies have the option to keep records outside the country, and to insist on an expansion in the scope of directors' `responsibility statement' to include related party deals. But I would have been happier if the committee had defined financial statement a little more comprehensively than stopping with ``P&L A/c, balance-sheet, cash flow statement, and notes to accounts''. The idea of ``separate AS and format' for small companies should keep the ICAI occupied in no small way.
Shadow of SOX
In what you may see as a sign of relying on SOX, the report wants more people to sign the financial statements: "The financial statements should also be signed by Managing Director, CEO, CFO, and the Company Secretary wherever such functionaries are mandated, whether or not they are present at the Board meeting at which the accounts are adopted. All the Directors who were present in the meeting, which approved the accounts, should also be mandated to sign the accounts. If a Director dissents, he should also sign the financial statement with the dissent note." CFO may have a larger role to play if Mr Irani's recommendations carry the day.
On internal controls also, the report has a few points to add: "Internal controls as mandated by the company with the approval of the audit committee, if any, should be certified by the CEO and CFO of the company and in the directors report through a separate statement on the assessment."
Audit committee comes to life in the report with a bias to independence. "All matters relating to appointment of auditors, examination of the auditor's report along with financial statements prior to consideration and approval by the Board, related party transactions, valuations and other matters involving conflicts of interest should also be referred to the Board only through the Audit Committee," reads the report. The chapter on board governance insists that the audit committee chairman should attend the AGM. Also, if the board overrules the recommendation of the audit committee, there should be disclosure in the Directors' Report along with the reasons for overruling, suggests the report.
Audit rotation fades away
About audit, the committee is categorical that there should not be any situation where the company is without duly appointed auditors. There are no earthshaking inputs on audit fee, except that reimbursement of expenses shouldn't form part of the remuneration. But the topic of rotation of auditors, which has been on rotation for quite some time, does not stir up Mr Irani's interest. The matter of change of auditors may be left to the shareholders of the company and the auditors themselves, rather than be provided under law, opines the report.
Since audit fee is said to bring in only bread, firms tend to look for non-audit services to make up some jam and butter. "The Committee was of the view that rendering of all services by the Auditors which were not related to audit, accounting records or financial statements, should not be prohibited from being rendered by the Auditors subject to a prescribed threshold of materiality."
Quite positive, that is. However, there is a ban that Mr Irani clamps on seven non-audit services provided to audit client and its subsidiaries.
These include actuarial, accounting, IT design, outsourced financial services, internal audit, investment banking, and provision of temporary staff. Happily, tax consultancy can coexist with audit, it seems.
A hot potato is auditor disqualification, where the committee fights shy of introducing materiality into taboos. However, there is a clear direction to the committee's thinking, which is visible when you read about the need to make applicable auditor disqualifications to his relatives too, to demand disclosure by the auditor of his holdings in the company's securities, to incorporate auditors' liabilities in the Act instead of in the Rules, and to quantify penalty for auditors in the Rules.
On cost audit, there is a confusing paragraph, perhaps because the report wants to soften the blow when it talks against the need for Government approval for appointment of cost auditor in the current liberalised context. The committee boldly questions the relevance of Section 619B of the Act, which is about the kid-glove treatment meted out to Government companies in the matter of accounts. CAG's test/supplementary audit is "superfluous since it would be duplicate audit work already done by the statutory auditor," reasons the committee unusually boldly.
"A camel is a horse designed by committee, said Alec Issigonis, the British engineer who designed Morris Minor and Mini. But, the task entrusted to the Irani panel was a tough call: As if to make the camel of Companies Act into a galloping corporate law.
Committees are rarely popular, as Ross Perot would affirm, "If you see a snake, just kill it — don't appoint a committee on snakes." Yet, to be fair, as regards company law reforms, killing has all along happened not because of committees but through Bills that went in limbo. So, one has to keep the fingers firmly crossed till the promised new Bill gets passed.
D. Murali
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