1.25 Query: Duties of the Board of Directors and of the auditor where the shareholders have directed the Board to revise the Annual Accounts at the AGM.
1. The querist has stated that the statutory audit report of a Government Company, XYZ Ltd., for the financial year 1994-95, was signed on 1.9.95. In the audited balance sheet, as on 31.3.1995, the accumulated losses exceeded the net worth of the company. Hence, the querist has mentioned in his 227(4A) report that it is a sick company under the Sick Industrial Companies (Special Provisions) Act, 1985. The company had taken a huge loan from its holding company for which interest was provided at an agreed rate.
2. According to the querist, subsequent to the audit, in October, the holding company decided to waive previous 2 years’ interest on this loan and agreed to convert this loan into equity. If interest had not been provided for two years in the accounts the net worth would have been positive as on 31.3.95. Hence, in this background, the General Body of the company did not approve the accounts and asked the Board to revise accounts after considering the above changes.
3. The querist has sought the opinion of the Expert Advisory Committee on the following issues:
(i) Whether it is permissible for the auditor to certify the revised financial statements as the audit report has already been given to the financial institutions and C & AG.
(ii) If the answer to (i) is in the negative what is the remedy to the board and the auditor?
Opinion January 15, 1997
1. The Committee notes that the issue raised in the query is whether it is permissible for the statutory auditor to give a revised report on the accounts revised by the company to incorporate as directed by the shareholders at its annual general meeting, the economic effect of an event occurring after the original report of the auditor, namely, the waiver of 2 years’ interest on a loan given by its holding company and the conversion of this loan into equity.
2. The Committee is of the view that in case the Board of Directors decide to revise the accounts as directed by the shareholders at its AGM in respect of the event stated in para 1 above and ask the auditor to give a revised report on the revised accounts, the auditor may issue a revised report. However, the auditor should consider whether the adjustment in the accounts as directed by the shareholders is in accordance with the accepted accounting principles prevailing in the country. In this context, the Committee notes that the Institute of Chartered Accountants of India has issued Accounting standard (AS) 4 on ‘Contingencies and Events Occurring After the Balance Sheet Date’, which deals with the accounting treatment of the events which have occurred after the balance sheet date. The Committee notes that para 3.2 of AS 4 defines the term ‘events occurring after the balance sheet date’ as follows:
“3.2 Events occurring after the balance sheet date are those significant events, both favorable and unfavorable, that occur between the balance sheet date and the date on which the financial statements are approved by the Board of Directors in the case of a company, and, by the corresponding approving authority in the case of any other entity.
Two types of events can be identified:
(a) those which provide further evidence of conditions that existed at the balance sheet date; and
(b) those which are indicative of conditions that arose subsequent to the balance sheet date.”
The Committee is of the view that in case the Board of Directors decide to revise the accounts as per the directions of the shareholders at its AGM, they will have to approve the financial statements again before the same are presented to the statutory auditors for giving their revised report. Accordingly, the event in question, namely, the waiver of the loan and the conversion of loan into equity would be considered to be an event occurring after the balance sheet date as per the definition of the said term as reproduced above since it is an event occurring between the balance sheet date and the date on which the financial statements are re-approved by the Board of Directors.
3. The Committee notes that as per AS 4, the events occurring after the balance sheet date should be accounted for in accordance with paras 13 and 15 thereof which are reproduced below:
“13 Assets and liabilities should be adjusted for events occurring after the balance sheet date that provide additional evidence to assist the estimation of amounts relating to conditions existing at the balance sheet date or that indicate that the fundamental accounting assumption of going concern (i.e., the continuation of existence or substratum of the enterprise) is not appropriate.
15 Disclosure should be made in the report of the approving authority of those events occurring after the balance sheet date that represent material changes and commitments affecting the financial position of the enterprise.”
4. The Committee is of the view that the question whether the waiver of interest should be adjusted in the accounts would depend upon whether the waiver of interest subsequent to the balance sheet date represents an event that provides additional evidence to assist the estimation of outcome of conditions existing at the balance sheet date or whether it represents an event which does not relate to conditions existing at the balance sheet date. The auditor should consider this aspect while giving the revised report and make a qualification or give a negative opinion in case the said amendment in accounts is contrary to the requirements of AS 4.
5. The report issued by the statutory auditor on such revised accounts will be in substitution of the report issued on the accounts before amendment and unless all copies of the original accounts and reports are returned to the auditor, such substitution is not possible. Thus, the auditor should ensure that unless all copies of the original accounts and report are returned to the auditor, an adequate disclosure of the fact of the revision on the accounts previously approved by the Board and reported upon by the statutory auditors appears as a specific note on the amended accounts. In case the statutory auditor is satisfied that the disclosure so made by the company in the Note on the accounts is adequate, there may not be any further need for the auditor to refer to the revision of the balance sheet and/or the profit and loss account in his report. However, if the Notes to accounts do not contain any note on the revision or if such a note is contained therein but not considered by the statutory auditor as adequately comprehensive, it will be the duty of the statutory auditor to refer to the fact of revision of the accounts in his report. In case, it is not be possible for all copies of the original accounts and report to be returned to the auditors, it would be necessary to ensure that adequate disclosure is made as discussed above either by way of a Note in the accounts or by a reference in Auditor’s report.
6. On the basis of the above, the opinion of the Committee on the issue raised in para 3 of the query is as follows:
(i) It is permissible for the auditor to submit a revised report on the revised financial statements in the manner suggested in paras 4 and 5 above.
(ii) Since the answer to (i) above is not in the negative, this question does not arise. _______________________________ |