Business Standard

IndAS, governance and audit committee

The committee seldom reviews financial statements in detail; with IndAS in place, this practice has to change

Asish K Bhattacharyya 

Asish K Bhattacharyya

On February 16, 2015, the Ministry of Corporate Affairs (MCA) notified the road map for the implementation of IndAS by companies other than the insurance companies, banking companies and NBFCs. IndAS is the set of Indian Accounting Standards fully converged with International Financial Reporting Standards (IFRS).

In the first phase, companies (listed and unlisted) having net worth of Rs 500 crore or more and their holding, subsidiary, joint venture or associate companies will apply IndAS effective from the financial year commencing on or after April 1, 2016 for the preparation and presentation of financial statements. They will provide IndAS-based comparative figures for the previous year.

In the second phase, all listed companies and unlisted companies having net worth of Rs 250 crore or more and holding, subsidiary, joint venture or associate companies of those companies will apply IndAS effective from the financial year commencing on or after April 1, 2017. Those companies will provide IndAS-based comparative figures for the previous year. Companies whose securities are listed on an SME Exchange are exempted from the mandatory application of IndAS. Any company, which is not mandated to apply IndAS, may choose to apply the same voluntarily effective from the financial year commencing on or after April 1, 2015 with comparative figures for the previous year. The choice is irrevocable.

Companies will apply IndAS for presenting both standalone financial statements and consolidated financial statements. If the holding company does not meet the threshold, but any of its subsidiaries, joint ventures or associate companies meet the same, it will adopt IndAS. Similarly, if a holding company meets the threshold, all its subsidiaries, joint ventures and associate companies will adopt IndAS. This might also impact fellow subsidiary companies.

The transition date is April 1, 2015 for companies, which are covered in the first phase and uses April 1 to March 31 of the next year as financial year. Thus, there is hardly any time left for IndAS implementation preparation. Implementation of IndAS will bring radical changes in corporate financial reporting practices in India. It brings new and complex concepts and higher level of transparency. It is expected that the application of IndAS will improve the quality of financial reporting.

Improved quality of financial reporting improves corporate governance because it helps investors, analysts and other stakeholders to better understand the financial position and performance of the company. However, full benefit of IndAS is derived only when companies take a holistic approach and apply IndAS in true spirit. It is found that in some countries the legacy system shadows the application of IFRS for quite a long period. India has to guard against this risk.

The audit committee will have to play a crucial role in implementing IndAS. It should develop the road map for implementation of IndAS and monitor its implementation. It is important that every manager in the company understands IndAS and the right information technology architecture is put in place.

Application of IndAS involves significant judgment and estimates. Therefore, it provides significant scope for managing earnings and window-dressing. The audit committee will have to be cautious in approving financial statements. Clause 49 of the Listing Agreement (SEBI Code of Corporate Governance) specifically requires the audit committee to oversee the company's financial reporting process and the disclosure of its financial information to ensure that the financial statement is correct, sufficient and credible; and to review, with the management, the annual financial statements and auditor's report thereon, before submission to the board, with particular reference to, among other things, major accounting entries involving estimates based on the exercise of judgment by management. Unfortunately, in most companies, the audit committee's engagement with the management is not as intensive as is desired. The current practice is that the statutory auditor makes a presentation before the audit committee and the a
udit committee asks some questions to satisfy that the internal control system is effective and the financial statements present a true and fair view. Seldom does the audit committee review, in detail, financial statements and accounting adjustments based on estimates that involve judgment. The current practice has to change with the implementation of IndAS.

It is seen that audit failure leads to corporate governance failure. Therefore, it is not wise to depend totally on the auditor's observations on internal controls and judgment-based estimates. It is said that a good auditor has a sceptical mind. The audit committee should also engage with the management and the auditor with the same questioning approach. In case of detection of management misfeasance and corporate governance failure, the directors cannot defend themselves by taking the plea that they relied on auditor's observations. They will be held guilty for not acting diligently and will face penalty.

The audit committee has to go the extra mile whether or not its members are adequately compensated for their additional responsibilities and efforts.

Affiliation: Professor and Head, School of Corporate Governance and Public Policy, Indian Institute of Corporate Affairs; Advisor (Advanced Studies), Institute of Cost Accountants of India; Chairman, Riverside Management Academy Private Ltd


First Published: Sun, March 08 2015. 21:34 IST