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Balance sheets: How to ensure credibility
January 14, 2009
The idea is that the working papers of the companies' statutory auditors, relating to financial statements, would be reviewed by an independent panel.
It should be obvious that this is a reaction to the Satyam fiasco, and the regulator wants to be seen doing its bit. In the given circumstances, such a move might well instill some confidence in the investing community about the veracity of the accounts of leading firms.
It might also make statutory auditors take their responsibilities more seriously because they stand to be challenged by their peers and run the risk of losing their reputation.
So Sebi may be justified in insisting that an independent auditor check whether the information collected by the company's statutory auditors does in fact reflect in their notes and review of the accounts.
However, it is not clear how this will work in practice. It would be quite extraordinary (and virtually unheard of in the world of joint stock companies) for one auditor to be sitting in judgment on another's work.
In an 'emerging' market like India's where there are nearly 7,000 listed companies, simply making sure that the top 50 companies are not misrepresenting their financial results is not really going to answer questions in the minds of the investor community.
However, even several rounds of auditing will not help unless accounting rules in the country are tightened.
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