A proposal is pending approval with the board of Securities Exchange Board of India (SEBI) regarding restatement of accounts of listed companies. A panel appointed by SEBI has proposed that stock exchanges can call for restatement of financial statements if the audit report has serious qualifications. Interestingly, the CEO and/or CFO of the organization will bear the cost of fresh audit. The shareholders will not have to pay for the audit fees. SEBI is holding the CEO and/ or CFO responsible for the misstatement and is allowing the final say on the financial statements to the auditors. As per the proposal, SEBI will discuss the seriousness of the qualifications with the Institute of Chartered Accountants of India before suggesting restatement of accounts to the company. You can read the full article here on Economic times.
The stated objective for the new proposal is to give more power to SEBI and auditors to ensure financial statements integrity and built a robustness in the reporting system. My personal doubt is whether this proposal will really be effective. There are two scenarios were financial statements lack integrity:
1) CEO/ CFO force auditors to write auditors report in their favor and/or
2) Auditors compromise ethics and give an unqualified auditor’s report an incorrect financial statement.
In both these scenarios the proposal is not saying much. Hence, I suspect that in this case auditors may become more pressurised into submitting unqualified reports. Rather than give independence to auditors, this guideline may become a deterrent to writing qualifications in the auditors report.
Additionally, there has to be some clarification on who will bear the cost of restatement if an honest mistake is made and a material fraud or error is discovered after submission of the audited financial statements?
What do you think of this proposal ? Do you think it is a move in the right direction or is it going to make it more difficult for auditors to give qualifications ?