Now, focus on accounting rules

Close on the heels of B Ramalinga Raju’s disclosure of fudging accounts of Satyam Computer and auditor’s failure to detect the fraud, analysts and chartered accountants in the country have turned the spotlight on accounting rules and regulators, demanding more disclosures and tightening of loopholes to avoid future embarrassments. wish list released by Credit Suisse, an international financial services group, today demanded that Institute of Chartered Accountants of India (ICAI) — the apex body of accountants and audit firms — should severely reduce the permitted items that companies can book directly in balance sheets. “In the near term, companies should be made to declare all unbooked mark-to-market losses every quarter,’’ Credit Suisse said in a report.The chartered accountants demanded that company promoters also disclose pledging and loaning of shares. In the recent development, founders of Satyam, led by Raju, had periodically pledged shares with lenders to raise funds for the company. The lenders were later forced to sell shares after the family found it difficult to pay the margin requirement as stock market plunged. “Promoters should disclose their pledged and loaned shares or any other material change relevant to investors,” said Gautam Nayak, a Mumbai-based chartered accountant. Investors’ focus has also now turned on intra-company financing and related regulations. They are demanding that companies should declare average levels of cash, near-cash investments and loans every quarter, including interest income and expenses. The companies should also make detailed explanations if average interest cost or yield is substantially different from prevailing rates so that investors can detect early signs of stress and increased borrowings. Bringing the regulators under the spotlight, Credit Suisse in its report urged the apex bodies to avoid tweaking of rules which will help companies or institutions reporting higher profit. A case in example is the recent Reserve Bank of India guidelines, which allows banks to restructure loans given to real estate companies. The move while helping banks, may encourage companies to make fewer disclosures and fully reflect extent of the problem. The regulators often fail to take action against auditors’ comment mentioned in the balance sheet. “There are very few instances of company law board or the stock market regulator — Securities and Exchange Board of India (Sebi) — writing to the companies seeking clarification on auditors’ qualifications,’’ said a chartered accountant. Still, a few others felt that rather than emphasising on changing rules, companies should follow the accounting guidelines in spirit and improve corporate governance and resolve conflict of interest. “Often, a part of a CFO’s salary is linked to the performance of the company, which encourages him to resort to practices which may not be considered prudent,’’ said another chartered accountant. Another case of conflict of interest is in relation to auditor fees. An auditing firm often finds itself out of business if it qualifies the accounts of a company. A few accountants sought protection from regulators, at least in cases of companies where the turnover is above a certain threshold level, to help them evaluate the balance sheet objectively. Still, chartered accountants maintained that India has adequate rules to protect investors’ interest. “The moment you mandate too much you shift to rule-based rather than standard report as followed internationally,’’ said Anil Sathe, president Bombay Chartered Accountant Society. Other changes mentioned by the Credit Suisse team included quarterly publication of minimum balance sheet details and consolidated balance sheet, detailed disclosure of material non-operating item and limits on promoter group transactions. – www.business-standard.com