Stock market experts are sceptical about the effectiveness of the Securities and Exchange Board of India’s (Sebi’s) decision to review the audit reports of the stock index tracker companies to prevent Satyam-type accounting fraud.
“It is a good step but it would be difficult to rule out such (Satyam-like) incidents completely as there are some areas where promoters have some discretion. Even the existing checks and balances are also not less,” Value Researchonline CEO and mutual fund analyst Dhirendra Kumar said.
Sebi had recently said that a peer review of the working papers (relating to financial statements of listed companies) of auditors would be conducted in respect of the companies constituting the NSE-Nifty 50 and the BSE Sensex.
The review comes on the heels of Satyam founder Ramalinga Raju disclosing a financial fraud amounting to about Rs 7,800 crore in the company over several years.
Speaking on Sebi’s decision, NexGen Capitals equity head Jagannadham Thunuguntla said, “The decision won’t prevent such incidents but it can put a sense of seriousness in the effective implementation of the power given to the auditor.”
Bonanza Portfolio Research Head P K Agarwal said, “The intention is good, but implementation will be an issue as the exercise involves various logistic issues. Auditing would involve a review by the third party which could take lot of time.”
Prime Database managing director Prithvi Haldea, however, thinks that Sebi’s move would help in preventing such frauds.
“Sensex and Nifty companies constitute 60-70 per cent of the market and so it is a move in the right direction to prevent such frauds,” he added.
Sebi also said the review of the earning statements of some listed companies outside the list of Nifty 50 and Sensex would be done on a random basis.
NexGen’s Thunuguntla said the Sebi decision is positive but not sufficient to bring back investors’ confidence in general and foreign investors’ confidence in particular.
He said, however, if the accounts are reviewed by the third parties, it will send a strong message to the investors.
On the issue of corporate confidentiality by such measures, Haldea said, “Corporate houses should only fear if they commit any fraud.”
Expressing a similar view, NexGen’s Thunuguntla added that considering the crisis in the market, the measure would be better for the companies to bring back the confidence of the investors. However, Agarwal said, “Nobody is questioning the good intention, but there might be conflict of interest as there is a same set of agencies.”
He further said applying such measures randomly and spontaneously, rather than regularly, would be a solution.