Sebi to penalise audit firms for manipulated certification

Capital market regulator Sebi is looking to bar audit firms from certifying accounts of listed companies for a certain period if accounts of books, certified by them earlier, are found to have been manipulated.

The decision by Securities and Exchange Board of India (Sebi) follows a recommendation to this effect by its Primary Market Advisory Committee (PMAC) to improve disclosure norms for companies coming out with public offer of shares.

“Sebi should penalise the audit firms that have certified the books of accounts of companies which were later found to have been manipulated, including debarring them for a specified period from certifying the accounts of listed companies,” the PMAC suggested.

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The role of audit firms came under the scanner following the country’s biggest accounting scam at the erstwhile Satyam Computer over three years ago. Along with the company’s then top management team, auditors were also accused for their lack of oversight in certifying it books of account.

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Earlier this month, Sebi asked all listed companies to submit separate filings with adverse audit observations made against them, in a move aimed at tightening noose around companies trying to hide issues raised by auditors in their voluminous annual reports.

In a circular issued on August 13, Sebi also asked the bourses to conduct immediate scrutiny of issues highlighted in these documents and seek necessary clarifications from the concerned companies about the observations made by auditors. If the auditors’ observations are found to be serious, the Sebi can ask the companies to restate financial accounts and to inform shareholders about it.

All listed companies are required to submit the copies of annual reports containing audited financial statements to the stock exchanges. However, many serious issues about the companies’ accounts, including possible cases of fraud, can go unnoticed even if they have been flagged by auditors, because such observations are generally buried deep inside the bulky documents like annual reports.

The new guidelines would be applicable to all annual audited financial results submitted by the companies for the period ending on or after December 31, 2012. Sebi has decided to accept the fresh recommendation regarding its penalty on audit firms, along with various other suggestions made by the PMAC.

Other recommendations include mandating the companies to make full disclosure of related party transactions with the book-running lead managers (BRLMs) of the public issue, “certifying the extent to which profits from these transactions constitute legitimate business profits”.

The Committee also recommended that in order to access the primary market through an IPO, a company should have been profitable for at least three out of the preceding five years, with a minimal average pre-tax operating profit of Rs 15 crore during the three most profitable years.

Also, the companies’ profitability would be computed on a restated, consolidated basis and the divisional profits would be permitted to be carried forward in cases of situations like de-mergers, as per another recommendation by the PMAC.

All these recommendations have been accepted by Sebi. The regulator has, however, disagreed with another PMAC suggestion to discontinue compulsory book-building mechanism for the issuers not eligible under profitability track record. The compulsory book-building mechanism aims to provide flexibility to the issuers setting up green field projects and the newer and smaller issuers, so that rigid eligibility criteria do not hamper their fund raising plans.

PTI