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Sox audit

(Guest)

What is SOX Audit?

Which type of companies are applicable for such type of audit?

Is it applicable in India?

what type of works is in its checklist?

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3 Replies

vinuth h s (Start Up - CA) (30 Points)
Replied 15 May 2016

Hi Abhishek,

SOX is not applicable directly in Indian Entities. Indian counterpart regulation is ICFR whcih talks about Internal controls.

Regards,

Vinuth H S

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Sathish M (Management Accountant) (40581 Points)
Replied 16 May 2016

Sarbanes - Oxley Act of 2002 (An Indian Perspective)

INTRODUCTION
1.	The cases of corporate failure in the United States have been under intense debate at al levels for quite some time. In the US, a series of studies/ investigations were conducted to look into the depth of the malaise leading to collapse of corporate giants, role and responsibility of different constitutents of the corporate governance mechanism, and the consequent various corective and preventive measures to be taken.
2.	Bsed on the information and details available, an attempt has been made at the ICAI level to go into the genesis such cases reported in US. These cases focus on the rold and responsibilities of the following: Board of Directors Management Audit Committees Compensation (remuneration) Committees Auditors Financial Analysts Credit Rating Agencies
3.	ICAI's Study on these cases highlights the following issues: Adequacy or otherwise of the corporate governance mechanism. Ensuring effective corporate governance in spirti rather than in letter. System of internal control, checks and balances Functioninig of Audit Committees Conflict of interest at all levels, i.e. regulators, management and auditors. Independence of auditors, financial analysts, etc. and the related issues, such as, appointment and fixation of remuneration of auditor, provision of non-audit services. Making accounting and auditing effective. Effective compliance and auditing effective Effective compliance of Accounting Standards Implications of pressures on earning on financial accounting and reporting Audit and reporting on continuous basis Accounting and disclosures requirements to match the complex financial transactions in a technology-drives economy. Effective mechanism for tracking and punishing corporate frauds. Expectation gap in the role and responsibility of auditors. Regulation of accounting and auditing profession Role and responsibility of the management, including qualifications of the CFO and key accounting personnel. Setting up of internal mechanism for ethical compliance and addressing ethical alarm. Compensation package, which lead to undesirable practices to prop up earning / share prices
4.	As an attempt has been made in the following pages to outline the major provisions of the aforesaid Act in regard to accounting and auditing issues and the comparative position in the Indian context.
5.	An attempt has been made in the following pages to outline the major provisions of the aforesaid Act in regard to accounting and auditing issues and the comparative position in the Indian context.
1.	Objective of the Act
1.0	Sarbanes -Oxley Act of 2002 (hereinafter referred to as the 'New Act') provides for improvement in quality and transparency in financial reporting, independent audit and accounting services for the listed companies creation of Public Accounting Oversight Board (Here-in after referred to as the Board) and increased corporate responsibility.
Views
1.1	The need for a new legislation in the US has arisen because of its Federal structure. At Federal level, US does not have a company law, which do nor provide for accounting auditing and other issues sought to be covered under the new Act. In India, the situation is far different. The Companies Act, 1956 does provide comprehensively in regard to accounts and audit. The Act not only deals with the formats of the financial statements but also prescribes for qualifications in the audit report, role and responsibility of the auditors, Director's responsibility for preparation and presentation of accounting standards. The Act also extensively deals with different aspects of the management (corporate governance) of the compnay-public or private and from incorportion wo winding up apart from fixing the responsibility of the directors, management, auditors, experts, whenever required etc. There are provisions as well for addressing the situation of the conflict of interest of directors as well as auditors in discharge of their duties and responsibilities. Within the framework of basic tenets of the corporate democracy, which the act advocates, independence of auditors has also been adequately dealt with. In case of delinquency, panel provisions do exist. In order to take care fo special circumstances which might exist in case of listed companies, Securities and Exchange Board of India Act, 1992, Rules and other requirements prescribed tereunder, make the framework for transparency in financial reporting and corporate responsibility further meaningful and more stringent.
1.2	Any discipline is not considered to be a profession unless it is subject to an Ethical Code and disciplianry mechanism carrying sanction of law. In the US, the accounting body at the Federal level i.e. American Institute of Certified Public Accountants (AICPA) is a voluntary association, not carrying any statutory mandate , did prescribe Code of Ethics auditing standards and other quality control measures. Accounting Standards setting body in US is in the private section and largely funded by the industry. This funding by the industry gives rise to conflict of interest. It is in the aforesadi background that the accounting profession in the US is called as 'self regulatory' profession. Different states in the US exercise disciplinary control over the accountancy profession which is confined to their own limited jurisdiction. The framework for the rgulation of the profession of accountancy in the US is thus not only fragmented and but also not well strcutured.
1.3	The posistion in India is again differnet. The Charterd Accountants Act, 1949 ws enacted only with a view to regulate the profession of accountancy in India. The Act is adminstered by the Institute of Chartered Accountants of India (ICAI) in accordance with the provisions contained in the Chartered Accountants Act, 1949. The accounting profession is, thus, in no way self regulated. The profession is regulated at the Central level, and in the same manner and t the same extent all over the country. Accounting, auditing and ethical standards are formulated and monitored for compliance under the provisions of the aforesaid law by the ICAI. The Act provides for adequate representation from the Government of India in the Council of the Institute and in the Disciplinary Committee of the ICAI. In the past, representatives of different organs of the Governement, trade and industry, trade unions, academicians have been nominated to the Councils of the Institute. A senior Government official has been, till recently, nominated to Disciplinary Committee. The Accounting Standards Board and recently constituted Peer Review Board provide for representation from the Coucil of the Institute. The composition of the Auditing and Assurance Standards Board (earlier known as Auditing Practices Committee) of the Institute has recently been changed to provide for outside representation on Board. The disciplianry mechanism of the Institute, which extends to professional or other misconduct of the memebers, might fetch away from an erring chartered accountant, his license to practicee, in addition to, and over and above, criminal liability which the chartered accountant might invite under the Companies Act, 1956, SEBI Act, other special Acts, and under general law.
1.4	The legislative framework for accounting and auditing in India unlike in USA, is far more comprehensive and includes, within its scope all types of audit firms and the economic entitites. The scope of the Chartered Accountants Act, 1949 also extends on the chartered accountants who not in practice including those who are in the business or in public life.
1.5	The new initiatives in the US for constituting Public Company Accounting Oversight Board should be understood and appreciated in the light of the aofresaid.
2. Public Company Accounting Oversight Board: Duties and Powers
2.0	Duties of the Board, as provided in the Act includes registration of public accounting firms, establishment or adoption of auditing, quality control, ethical independence and other standards, inspection or registered firms, investigation and disciplinary proceedings concerning registered public accounting firms.
Views
2.1	The New Act envisages setting up of the Board and entrusting upon it, the duties as a foresaid at the Federal level in the background of the fact that there was no legislative framework or mechanism in the US to provide for the above functions. In India, all these functions have been entrusted upon the ICAI and additonally supported andm supplemented by the provisions contained in the Companies Act, 1956 and the SEBI Act, 1992. The ICAI formulates the Accounting Standards which are then notified by the Governement of India based on the recommendations of the National Advisory Committee on Accounting Standards set up under the Companies Act, 1956. The Committee is also empowered to advise the Government on matters related to auditing. Compliance with the accounting standards has been made mandatory by the companies under the Companies Act and was long back made mandatory for the auditors, by the ICAI. The Institute has been empowered with authority to conduct investigation and disciplinary proceedings against the erring chartered accountants. While doing so, it acts as a quasi-judicial authority under Section 21 of the Chartered Accountants Act, 1949. The Companies Act, 1956 also empowers the Central Governemnt to carry out investigation into affairs of the company and, in that process if the found erring, to prosecute the auditor.
2.2	The requirement under the new dispensation in the US for calling for particulars from the accounting frims like details on client-wise fee, fee from audit and non audit services and quality control measures in place in the accounting firm. These requirements, as such do not exist as of now in India. With the recent introductioon of Peer Review System, such details would now be called for. Perhaps, the provision of the new Act are intended to provide the Public Company Accounting Oversight Board, the relevant information about financial dependence of the accounting firm on any of the clientsw for non-audit services, rendered by the accounting firm to such clients. The institute has, however sought to achieve the objective behind calling for such information by prescribing norms. For example, the members have been advised that total fees received by them from one client should not be more than 40% of their total fees. A cap on fee for non-audit services has also been imposed by the ICAI. As far back in 1974 Part-II of Schedule VI was modified to provide for disclosure of payments to auditors for audit fees, other services, and out of pocket expenses. The Statement on payments on Auditors for other services, issued by the Institute of Chartered Accountants of India requries much greater disclose of payments made to the auditors. Similarly, the Companies Act, 1956 provides that the auditors should not have any stake in the securities of the Companies.
2.3	As regards quality control, the Institute has the responsibility under Section 15 of the Chartered Accountants Act to ensure quality of standards of performance of its members. Apart from standards on quality control, Continuting Professional Education, mechanism for Peer Review, backed by disciplinary mechnism are some of the steps taken by ICAI in the regard. InIndia, ICAI looks quality aspect in a much wider manner and focus on quality consciousness, unlike in USA, right form imparting of education, in a wholesome manner.
2.4	As far as registration is concerned, the Chartered Accountants Act provides that no chartered accountant can practice unless the Chartered Accountant obtains the Certificate of Practice (CoP) from the Institute and registered with Institute with CoP renewed every year. The Act is sought to be amended to enable the Institute if so warranted, to impse quality related stipulated before renewal of the Certificate of Practice.
3. Period of Keeping Audit Working Papers
3.0	The New Act provides that each public accounting firm shall prepare and maintain audit work papers and other information related to the audit report, for a period of not less than 7 years. Further, the New Act amends the United States Code by inserting section 1520 that requires an accountant who conducts the audit of an issuer to maintain all audit or review working papers for a period of 5 years from the end of the fiscal period in which the audit or review was concluded.
Views
3.1	In India, under the Chartered Accountants Act, 1949, the members are required to maintain their working papers in relation to any attest fucntion for a period of 10 years.
4. Auditing Quality Control and Financial Standards
4.0	In the Act, the Board has been empowered to establish or adopt standards proposed by professional groups of accountants designated or advisory groups.
Views
4.1	These standards are formulated and issued by the Institute of Chartered Accountants of India. It is reiterated that the Institute of Chartered Accountants of India is a statutory body set up under an Act of Parliament viz the Chartered Accountants Act, 1949. On the other hand as stated, in the US, this was being done earlier by a voluntary associations i.e. AICPA.
5. Concurring and Second Partner Review
5.0	The New Act provides for review of audit report by a concurring or a second partner
Views
5.1	The ICAI has from time to time suggested to the Government of India to introduce the concept of joint audit in relation to certain categories of enterprises. Such a provision is expected to be much more rigorous than what is contemplated in the new Act.
6. Scope of Quality Control Standards
6.0	The New Act also seeks to define the scope of quality control standards, internal accounting control and in regard to issuance of audit report.
Views
6.1	In India, the quality control standards issued by ICAI cover all the aspects stated in the new Act. As regards the internal accounting control, the requirement already existed in India not only as a key audit requirement, but also through specific assertion in the audit report required to be given under Section 227(4) (a) popularly known as MAOCARO, 1988
7. Penal Provisions for Auditors
7.0	The New Act provides for sanctions on the auditing firms which includes temporary or permanent revocation of the firm or the person associated with the firm, censure and civil monetary penalty. It also provides for a liberal view i.e., instead of award of punishment, as above, the member may be required to undergo required professional education and training.
Views
7.1	Compared to above, in India, the Chartered Accountants Act, 1949 provides for censure or removal from the practice, permanently or for a particular period. There is no provision for imposition of civil monetary penalty. This is not required as well in view of the civil and criminal action contemplated is the relevant Act like the Companies Act, SEBI Act or under Common law.
8. Inspection
8.0	Under the new Act, the Board has the power to periodically inspect the public accounting firm. Inspection in regard to a firm which audits more than 100 companies may be on an annual basis.
Views
8.1	This is analogous to the provison of peer review mechanism in India. The System in India provides for independent review i.e.,(review by independent reviewers appointed by the Institute, and, not on firm on firm basis). The earlier mechanism in US (firm on firm basis) proved to be highly inadequate.
9. Extending Jurisdiction Over Foreign Accounting Firms
9.0	The New Act provides that foreign public accounting firms that prepares an audit report with respect to the listed companies in US shall also be subject to same set of standards as prescribed in respect of US firms. In case some components of the company has been audited by the foreign firm, the registered public accounting, firms the working papers of such foreign firms shall also be made available to the firm and the Board.
Views
9.1	In India, under the new auditing standards, currently under exposure for public comments, the Institute has provided that in such cases the Indian auditor shall assess the professional competence of the other auditor, and may review his working papers. Foreign accounting firms have entered in India through the circuitous route of the Reserve Bank of India's approval having not been able to register with the Institute of Chartered Accountants of India. As understood, such firms are providing audit related services in circumvention of the alw and are outside the purview (regulator or ethical ) of all the authorities.
10. Accounting Standards Setting Body
10.0	The Board has been empowered to recognise Accounting Standards developed by the bodies which fulfils certain conditions. As mentioned earlier, the agency earlier setting accounting standards was a private one and recent events proved inadequacies thereof.
Views
10.1	It may be noted that under 210A of the Companies Act, 1956, National Advisory Committee on Acconting Standards (NACAS) is responsible for making re-commendations to the Central Government for prescripttion of accounting standards. The basic accounting standards are formulated by ICAI set up under Act of the Parliament. In fact, the position in India is much more stringent in terms of legal requirements vis-a-vis proposed US position.
11. Adoption of the Principle-Based : Accounting Standards
11.0	The Board would carry out a study for adoption of a principle-based accounting system for financial reporting.
11.1	The Accounting Standards promulgated in India follow closely the pattern laid down by the International Accounting Standard Board (earlier International Accounting Standards Committee) which are principle based rather than rule-based. The adoption of principle based standards is always considered much superior because it gives an element of flexibility to assess the appropriatences of accounting treatment in particulars set of circumstances. In that regard, the India has been much ahead vis-a-vis US.
12. Non - Audit Services
12.0	The New Act has prohibited certain types of services for being rendered by an auditing frim to the same audit client. The Board has been empowered to provide exemption on case to case basis from the prohibition.
Views
12.1	In India, many of these services like book keeping accounting, designing of any system which is subject matter of the audit, internal audit, brokering, investment, advisory, investment banker services, are already prohibited for the auditing firm. In regard to services other than these, the ICAI was first in the world to impose a cap on fee for non-audit services. There is no leverage available in India for exemption on case to case basis.
13. Audit Partner Rotation
13.0	The New Act provides for rotation of lead audit partner every 5 years. The proposal is aimed at ensuring independence of the auditor.
Views
13.1	The ICAI has already made a suggestion to the Government to introduce the system of the joint auditor and also a mechanism for fixation of audito'r remuneration independent of the management. this would be far more effective than what is now contemplated in the US.
14. Audit Committee
14.0	The New Act provides for reporting by the auditor to the audit committee, on critical accounting policies and practices to be used, discussions with the management officials and other material communication with the management. The term "audit committee" has also been defined. In case there is no audit committee, the entire Board of Directors would act as an audit committee.
Views
14.1	The provisions of the Companies Act, 1956 and the listing requirements prescribed by the SEBI cover the above intent explicily or in board terms. Audit Committee have been made responsible for the over-sight of the work of auditor. There could be a case for eludidation at best, and provision that all the members of the audit Committee should be independent. Further, in India, the constitution of audit committee is mandatory and the functions cannot be assumed by the Board of Directors.
15. Conflict of Interest
15.0	The New Act provides that an audit firm whose employee during the last one year was Chief Executive Office, Chief Financial Officer, Comptroller, Chief Accounting Officer can not act as an auditor of that company.
Views
15.1	In India, however, the Code of Ethics implicitly provides that in case of post employment or other dealings of the auditor with the auditee whatsoever, it would be a normal presumption that the independence of auditor would get jeopardized.
16. Corporate Responsibility for Financial Reports
16.0	Under the New Act the principal executive officers and the principles financial officers, or persons performing similar functions of each company filing periodic reports to the Securities and Exchange Committee are required to certify that the signing officer has reviewed the report, the report does not contain any untrue statement or omits a material fact and the financial statements present a fair view.
16.1	Sucg officers have also been made responsible for establishing and maintaining internal controls; and are also required to report on the effectiveness of the internal controls in the financial reports, as well as to the auditor and the audit committee. They are also required to disclose to the auditors and the audit committee any fraud that involves management or other employees.
Views
16.2	In India, the financial statements are required to be signed by or on behalf on the Board of Directors of the company. Under section 217 of the Companies Act, 1956, the directors are also required to issue a directors report about the affairs of the company during the year under report. One of the important components of the directors report is the Director's Responsibility Statement (issued pursuant to section 217 (2AA) of the Companies Act, 1956). The directors' Responsibility Statement states the following: that in the preparation of the annual accounts, the applicable accounting standards had been followed along with proper explanation relating to material departures; that the directors had selected such accounting policies and applied them consistently and made judgements and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company at the end of the financialo year and of the profit or loss of the company for that period; that the driectors had taken proper and sufficient care for the maintenance of adequate accounting records inaccordance with the provisions of this Act for safe guarding the assets of the company and for prevening and detecting fraud and other irregularities; that the directors had prepared the annual accounts on a going concern basis.
16.3	It is clear from the above that, in essence, the requirement stipulated by the New Act already existed in the Companies Act, 1956. The auditors of a company are also requried to report (under MAOCARO, 1988) whether that is an adequate internal control procedure commensurate with the size of the company and the nature of its business. In case the auditor gives a qualified answer or an unfavorable answer to the question, the auditor's report also states the reasons for such qualified answer or unfavorable answer, as the case may be. It may be noted that the director's report is issued to the general public at large unlike the United States where the certification of facts required by the New Act is only to done in the filings before the Securities and Exchange Commission.
16.4	Under Section 628 of the Companies Act, 1956 any person(s) who make a statement in any return, report, certificate, balance sheet, prospectus, statement or other document which is false in any material particular or which omits any material fact is punishable with imprisonment for a term which may extend to two years and is also liable to a fine.
16.5	Under the provisions of the Companies Act, 1956, the Central Government has the powers to conduct an investigation into the affairs of a company where in application in this regard is made by the members of the company (section 235). The Central Government can suo motto conduct the investigation, if in the opinion of the Company Law Board, the business of the company is being conducted with intent to defraud the creditors investors, members or other persons (section 237). Any person who, as a result of the investigation, is found guilty of any offence like fraud or malfeasance or misfeasance is liable to be prosecuted. It may also be noted that the company, if found guilty, can also be noted that the company, if found guilty, can also be wound up. Further, proceedings against the company for recovery of damages or property can also be initiated.
16.6	The concept of 'principal financial officer' being responsibel for the preparation and presentation of the financial statements has to be explicitly recognised. This concept of 'principal financial office' is not present in India. The institute has from time to time suggested to the Government to introduce the concept of Chief Financial Officer. The Chief Financial should be a chartered accountant and should be responsible for the over-all preparation and presentation of the financial statments. It may be appreciated tha the Chief Financial Officers of almost all the companies which have went for bankruptcy in the United States were not Certified Public Accountants (Chartered Accountant in Inda).
17. Enhance Conflict of Interest Disclosure
17.0	The disclosures are required to be made to the SEC in regard to loan, etc, to the Directors or the Executive Officer of the company.
Views
17.1	In India, ther requirements under the Companies Act, are much more comprehensive. Schedule VI calls for disclosures and under MAOCARO a specific assertion by the auditor in this regard is required in the audit report.
18. Disclosure of Audit Committee Financial Experts
18.0	The rule requries that at least one member of the audit committee should be a financial expert in the manner defined under the Rule.
Views
18.1	In India, underclause 49 of listing agreement provides that at least one of the members should have financial and accounting knowledge. Possibly the requirement in this regard can be made more specific.
19. Improper Influence on Conduct of Audits
19.0	Under the New Act, it is unlawful for any person to take any action to fradulently influence, coerce, manipulate, or mislead any independent public or certified accountant engaged in the performance of an audit of the financial statements of that issuer for the purpose of rendering such financial statements materially misleading.
Views
19.1	This requirement of he New Act is a good move towards ensuring the independence of the auditors. Currently, there are no similar provsions under the Indian statutes. However, in generally the provisions are governed by the contract of employment and the general law of the Country.
20. Enhanced Review of Periodic Disclosures by Issues
20.0	Under the New Act, the Commission is requried to review the disclosures mae by certain public companies falling in the criterion laid down by the New Act. Such review shall include a review of an issuer's financial statements.
Views
20.1	The Institute of Chartered Accontants of India has constituted a Financial Reporting Review Panel (FRRP) with the objective of reviewing the financial statements of certain enterprises. The main objective of the FRRP is to secure compliance with the accounting standards and to ensure that the financial statements give a true and fair view.
21. Authority of the Commission to Prohibit Persons from Servin as Officers or Directors.
21.0	The Commission has been granted powers to issue an order to prohibit, conditionally or unconditionally, and permanently or for such period of time as it shall determine, any person who has violated certain provison of teh securities law in the US.
Views
21.1	Section 274 of the Companies Act, 1956 prescribes the disqualification for becoming director in a company. Under the section, a person is not capable of being appoint director of a company if he is disqualified by an order under section 203 lays down the situations and the corresponding orders that can be passed by appropriate authorities. The main purpose of the section is to restrain fraudulent persons from managing companies. It may also ne noted that in the case of default under the rules and regulations framed by the securities and Exchange Board of India, the Company and the person concerned may be penalized by fines.