Correctives for India Inc.

Oversight of auditors and independent directors and tighter accounting norms are needed

Written by Sanjay Kr Singh | Published:January 19, 2009 12:54 am

In the aftermath of the Satyam scandal,a number of reforms are being mulled. A lot of the blame is being laid at the doors of the auditors who failed to detect the missing cash. According to Pune-based financial planner Veer Sardesai,“The peer review system that Sebi is talking about would be a step in the right direction.” Sebi plans to have a panel of auditors. Once the company’s auditors have finished auditing,Sebi could ask its own auditors to re-audit the accounts of a few companies selected randomly. Sardesai also urges stringent punishment for auditors. “If punishment for the guilty is not stringent,then promoters’ blandishments will be hard to resist.”

The role of independent directors has also come under scrutiny. The dilemma here is that if a company doesn’t pay its directors well enough,it does not get eminent people for these posts. But if the company pays high salaries,then the directors don’t dare bite the hand that feeds them. S.K. Mittal,chartered accountant and chief executive officer of New Delhi-based Saksham Advisory Services suggests: “A corpus could be created with contributions from listed companies in proportion to their market cap or revenue. Sebi could create its own panel of directors and pay them out of this corpus.”

Curtail window dressing

A need for tighter accounting norms has also been felt.

Mark-to-market losses should flow through income statement. Suppose a listed company has made investments worth Rs 50 crore and the market value of those investments falls to Rs 40 crore. Many companies show this directly on the balance sheet by reducing both assets and shareholder’s equity by Rs 10 crore,and offer the details in footnotes. Ideally,the loss should also be shown in the income statement. Explains Pushkal Pandey,professor of International Finance,Skyline Business School: “Investors may not read the footnotes,but if it is shown in the income statement the loss comes to their notice.”

Reduce gap between consolidated and standalone statement. Earnings from the investment of a listed company in another should be reflected in its results according to global norms. If the holding is more than 50 per cent,then the balance sheets and income statements must be merged and a consolidated statement prepared. If the holding is between 20-50 per cent,the equity method of accounting should apply. Add income from the subsidiary to the listed company’s standalone income statement in proportion of shareholding. If shareholding is less than 20 per cent,apply the cost method: show dividend from the smaller company as income; show the investment at cost; and keep adjusting the market value of shareholding. Following these measures will reduce the gap between standalone and consolidated profits. Regulators also need to make consolidated account reporting mandatory for quarterly results.

Disclose to stock exchange pledging of shares. At present,only when promoters sell shares of their companies do they inform the stock exchange. “If promoters sell shares,news of it could drive investors away. Promoters get around this by pledging their shares,” says Pandey. So even when promoters pledge their shares,they should inform the exchange.

Reduce time allowed for filing balance sheets. At present companies have to file only their annual reports,not their quarterly reports. Companies can file their annual reports by September (six months after the financial year closes). Regulators should reduce filing time for annual reports to three-four months.

Since information is power,stricter disclosure norms will enable ordinary shareholders to take more informed decisions.

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