CA Ayush Agarwal (Kolkata-Pune-Mumbai) (27186 Points)
07 April 2010
CA Ayush Agarwal
(Kolkata-Pune-Mumbai)
(27186 Points)
Replied 07 April 2010
ICAI decided to review financial statements of 150 listed companies
The Institute of Chartered Accountants of India (ICAI) has decided to review financial statements of 150 listed companies across bourses as part of its policy to tighten accounting standards in the country after the Rs 8,000-crore Satyam scandal. Any anomaly discovered would be forwarded to the ministry ofcorporate affairs (MCA) and market regulator Sebi for appropriate action.
According to ICAI president Amarjit Chopra, the probe would be conducted by the Financial Reporting Review Board (FRRB). The board, set up in 2002-03, has members ranging from Comptroller and Auditor General of India officials to senior members of ICAI. “Since we do not have the powers to take action against companies (involved in fudging accounts) we will pass on the information to the MCA and Sebi,” Chopra told FE.
The accounting regulator would rely on tip-offs from industry sources and media reports to select the companies for the probe. Though Chopra did not share the names of the companies to be brought under scanner, he hinted that some big corporate brands could be probed as well. “We will pick up companies from the BSE and NSE… say the top 30 from each… mostly we rely on media reports,” he added.
Currently, ICAI is not empowered to order for the books of companies. “Our probe would start once the companies file the financial statements, which is available in public domain,” Chopra clarified.
In fact, the institute would write to the government proposing amendments to the Chartered Accountants Act, 1949. “Our proposals would be based on the recommendations made by the high-powered committee report (submitted to the government last year),” Chopra said.
The general council of the institute is slated to meet in the first week of May after which the proposals would be sent to the government. “We will seek more teeth for the FRRB… our proposal would be sent to the government before May 15,” Chopra said.
As reported by FE earlier, the government is mulling the option of giving more teeth to the accounting regulator to create more transparency for foreign audit firms practising in India. The MCA is expected to moot amendments to the Act later this year.
Apart from the probe initiated by ICAI, the corporate affairs ministry has set up a special software-based system called the Early Warning System. The EWS is expected to throw up any unnatural development based on the scrutiny of quarterly results of the companies, public announcements, filing with exchanges and media reports among others.
CA Ayush Agarwal
(Kolkata-Pune-Mumbai)
(27186 Points)
Replied 07 April 2010
ICAI panel hit out at banks for not doing due diligence on Satyam before giving loans
Accounting regulator Institute of Chartered Accountants of India (ICAI) probe panel has hit out at banks for not doing due diligence on Satyam Computer Services before giving loans, and wondered why the government put Deepak Parkeh on its board despite his HDFC group being a major creditor to Ramalinga Raju’s company.
“There is no explanation as to why the banks… while sanctioning short-term loans did not seem to have posed any question as to why the company which was supposedly cash rich as per its financial statement was taking loans from them,” said the ICAI in its final report on the Saytam scam.
The banks that gave loans to Satyam during 2000-08 despite the company claiming huge surpluses, were HDFC Bank (Rs 530 crore), Citibank (Rs 223.87 crore) Citicorp Finance (Rs 222.28 crore), ICICI Bank (Rs 40 crore) and BNP Paribas (Rs 20 crore), totalling Rs 1221.16 crore.
The high-powered group of ICAI, headed by former President Uttam Prakash Agarwal, also questioned the appointment of HDFC Chief Parekh on the board of Satyam to revive the IT company following the scam. “…the Committee is unable to understand how the Chairman of HDFC Bank was appointed as an independent director post Satyam fiasco,” said the report, which has been submitted to ICAI’s council for further action. Although Parekh, who heads HDFC, is not the Chairman of the Bank, the reference in the report is to him only, said a member of the committee when contacted.
Following the admission of the fraud by Raju in January 2009, the government superseded the then Satyam board appointing its own nominees who, besides Parekh, were Kiran Karnik, T N Manoharan, S B Mainak, C Achutan and Tarun Das.
The committee has also recommended disciplinary action against “the audit firm, its partners…the then Chief Financial Officer (CFO) and the head of internal audit department.”
CA Ayush Agarwal
(Kolkata-Pune-Mumbai)
(27186 Points)
Replied 07 April 2010
ICAI planning to crack down on CA firms who indiscriminately use the brand names of the global firms they associate with
The Institute of Chartered Accountants of India (ICAI) is planning to crack down on local chartered accountant (CA) firms that would indiscriminately use the brand names of the global firms they associate with. A high-powered committee of ICAI set up to look into the accounting loopholes that were exploited during the Satyam scandal has recommended that there should be clear terms and conditions between the Indian CA firm and the foreign one for use of brand names. The terms and conditions should be made known to the ICAI in advance for ratification.
A copy of the committee’s report that FE has obtained, states that the ICAI’s disciplinary council can consider “action to be taken” if Indian accounting firms continue to use international logos, in defiance of the terms and conditions. It said, “The council may consider action to be taken to ensure that the firms which have used the name and/or logo of their international network in their letterheads/professional documents in contravention of council directions on the subject rectify the same and ensure that no violation is committed by them.”
The practice of some representatives of Indian firms carrying two business cards-one of the Indian CA firm and the other of the foreign one to get business for the former-has also been reported by the committee.
In fact, soon after the Satyam scam was unveiled, the ministry of corporate affairs, headed then by PC Gupta, circulated a note that talked of the need to stop such practices.
The report was also critical about the nature of the arrangement reached between Indian audit firms and their foreign partners. The committee had, in fact, sent letters to Indian audit firms to share information, contract letters, copies of agreements and details of remittances between the two parties over the arrangement.
However, some firms chose to remain tightlipped on the matter and did not share the information with the institute. The high-powered committee categorically states that “some firms” have not furnished the details of the arrangement “especially those which have affiliations with the Big Four multinational accounting firms KPMG, PricewaterhouseCoopers, Deloitte Touche Tohmatsu and Ernst & Young.
The committee has noted that the terms & conditions of the arrangement between an Indian CA firm and an international one is made clear with details of the remittances received given in the partnership deed before Indian CA firms can use the logos. “Arrangement for sharing of fees/profit with other Indian CA firms with similar/identical name and with the multinational entity,” it said. Set up under former ICAI president Uttam Prakash Agarwal, the high-powered committee had sent its first report to the ministry of corporate affairs in July 2009. This is the second report, which is a continuation of the first one. The report would be taken up by the general council of the institute next month. The current president of the institute Amarjit Chopra had earlier told FE that ICAI would seek more powers from the government to tighten accounting standards.
CA Ayush Agarwal
(Kolkata-Pune-Mumbai)
(27186 Points)
Replied 07 April 2010
A new Controversy by CBDT: Disallowance of Forex Derivative Losses
Let’s start with the bad news this week. Accounting principles say losses are tax deductible, but CBDT says no! Not if they are forex derivative losses. Last week, the Central Board of Direct Taxes or CBDT issued an internal circular which says that a loss arising from an outstanding Marked to Market forex derivativetransaction is, “contingent in nature and cannot be allowed to be set off against taxable income. The same should therefore be added back for the purpose of computing the taxable income of an assessee.’
Rostow Ravanan, CFO, Mindtree
For most companies, especially for an IT company, which is eligible for export exemptions, all our returns get picked up for scrutiny anyways. So when our assessment gets picked up for 2009, the returns we have filed in September, sometime now is when assessment starts… the assessing officer will invoke this circular and make that adjustment and raise a demand note on us for short payment of tax. So it will clearly become a problem.
All this, despite the fact that accounting principles in fact, insist that forex derivative positions must be marked to market and any such gain or loss must be reflected in the P&L. That means any such loss would be treated as expenditure and hence be deducted from taxable income! But the CBDT circular says otherwise.
Dinesh Kanabar, Deputy CEO & Chairman-Tax, KPMG
From time to time there has been this issue that should there be a convergence or divergence between an accounting treatment and a tax treatment. And by and large the courts have come back to say that unless there is a specific provision in the law whereby the taxability of a transaction has to be in a prescribed manner, accounting principles will govern the taxability of income. This circular turns that entire principle on its head. I don’t think it lays down the correct principle in law.
Law that was reaffirmed by the Supreme Court in the Woodward Governor case last year.
The Delhi-based company suffered unrealized losses due to foreign exchange fluctuations. The Revenue disallowed these losses as exemptions, on the basis that they did not qualify as ‘expenditure’.
The department claimed that under Section 37 of the Income tax Act, ‘expenditure’ had to be ‘laid out or expended wholly and exclusively’ and exchange fluctuations did not meet that requirement.
But the apex court overturned these arguments. It held that unrealized forex losses are items of expenditure and are deductible as per principles of commercial accounting.
Dinesh Kanabar, Deputy CEO & Chairman-Tax, KPMG
Now one may want to make a distinction between forex transactions and a transaction on account of derivatives, but the logic which has been put out, which is that why in the view of CBDT such a loss is not allowable, is exactly the reasoning which has been disapproved by the SC in Woodward Governor’s case. And therefore to that extent this is in direct conflict.
That’s not all-the circular disallows not just notional losses, but real ones as well. It says that realized losses on forex derivatives will be treated as ‘speculative losses’ unless the transaction was carried out on a recognized stock exchange. And under the Indian Income Tax Act, speculative losses can be set off only against speculative gains, and not against business income.
That’s bad news for Hyderabad-based pharmaceutical company Dr Reddy’s, which says it entered into forex derivative transactions for non-speculative purposes. The company has over Rs 30 crore in outstanding derivative losses-losses which may be taxed on settlement under this new circular.
Umang Vohra, CFO, Dr Reddy’s
Principally, we are not a company which is a financial intermediary, we are a company which has manufacturing operations and business operations and we try to protect our cash flows and that is the stated intent of our policy. And we believe we should be allowed to set this off against business income in the first place. Secondly, the definition of what is speculative or not speculative should not be linked to which exchange you settle this on or trade this on. It should be linked to what is the underlying purpose of this transaction rather than the mode of its settlement.
But whether taxpayers like it or not-CBDT circulars are binding on Assessing Officers. And that will mean tax liabilities on forex derivative losses for all future assessments
Actually not just future assessments but perhaps even past ones-because there’s no clarity on whether this circular will be applied with retrospective effect or not.
But – there may be a silver lining. CBDT circulars are only meant to clarify existing positions of law and not to propose new interpretations of the provisions of the Income Tax Act. But this circular does. In addition, given the fact that this circular contradicts fundamental accounting and legal principles, most experts think it is unlikely to be upheld in court. But for a court to intervene-corporate India will have to fight a new prolonged legal battle with the taxman.
Source: Moneycontrol
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