Query No. 23

 

Subject: 

Audit  of  quarterly/half-yearly  complete 

set  of  financial statements.1

 

A. Facts  of  the  Case

 

1. Even though SEBI only requires presentation of quarterly financial results, company ‘A’ prepares a complete set of quarterly financial statements (in the same manner as it does for annual financial statements).  The Board of the company has desired that the aforesaid quarterly statements should be audited by the statutory auditors who submit an audit report. In other words, these financial statements are audited in accordance with generally accepted auditing standards in India at the request of the Board of Directors.

 

2. In the context of reporting of the quarterly and half-yearly financial statements by companies, the querist has drawn attention of the Committee to the following requirements in this regard by the statutory authorities in India:

 

Securities and Exchange Board of India (‘SEBI’)  guidelines:

 

Though, the SEBI guidelines do not mandatorily require the companies to file full scope audited financial statements either quarterly or half- yearly for complying with the requirements of the listing agreement, the company has been voluntarily filing full scope quarterly audited financial statements with the SEBI.

 

As per clause 41 of the Listing Agreement:

 

 The companies should furnish un-audited financial results on a quarterly basis to the stock exchange in the prescribed format within one month from the end of the quarter.  In addition, the company shall prepare half-yearly results approved by the board and subjected to limited review by the auditors of the company. A copy of the same shall be submitted to the stock exchanges within two months after the close of the half-year;

 

The companies have an option to publish audited half-yearly financial results within two months instead of the above requirement; and

 

The companies have an option to publish un-audited quarterly consolidated financial results in addition to the un-audited quarterly financial results of the parent company as currently required under clause 41 of the Listing Agreement.

 

The company proposes to voluntarily comply with the requirements of clause 41 as regards consolidated financial statements.

 

Requirements of the Companies Act, 1956 (‘the Act’):

 

There is no specific requirement of quarterly or half-yearly financial statements in the Act.  However, extracts of some of the relevant provisions of the Act are stated below:

 

          Section 210(1) of the Companies Act, 1956, states the following:  

“At every annual general meeting of a company held in pursuance of section 166, the Board of directors of the company shall lay before the company –

 

        (a)        a balance sheet as at the end of the period specified in sub- section (3); and

 

        (b)        a profit and loss account for that period.”

 

Sub-section (3) states that “The profit and loss account shall relate–

 

        (a)        in the case of the first annual general meeting of the company, to the p eriod beginni ng with the incorporation of th e                             company and ending with a day which shall not precede the day of the meeting by more than nine months; and

 

        (b)        in the case of any subsequent annual general meeting of the company, to the period beginning with the day immediately after                     the period for which the account was last submitted and ending with a day which shall not precede the day of the meeting                     by more than six months, or in cases where an extension of time has been granted for holding the meeting under the second                     proviso to sub-section (1) of section 166, by more than six months and the extension so granted.”

 

Sub-section (4) states that “The period to which the account aforesaid relates is referred to in this Act as a “financial year”; and it may be less or more than a calendar year, but it shall not exceed fifteen months:

 

Provided that it may extend to eighteen months where special permission has been granted in that behalf by the Registrar.”

 

The form of the audit report has been prescribed in section 227(2) of the Companies Act, 1956.  This section requires that the audit report should be addressed to the members of the company. The querist has also provided the suggested formats of audit report for the company (stand-alone)  and  the  consolidated  financial  statements  of  the company and its subsidiaries on the quarterly financial statements which are given in Annexures I and II respectively.

 

3. The querist has also provided the terms of engagement of the auditor as additional information which clearly provide that the audit is not a statutory audit as per the requirements of the Companies Act, 1956.

 

B. Query

 

4. The querist has sought the opinion of the Expert Advisory Committee on the following issues:

 

        (a)        To whom should the audit report on stand-alone financial statements and/or consolidated financial statements be addressed–                     shareholders or the Board of Directors or both?  If the appointment is by the Board of Directors, whether it is correct to                     report to shareholders on the request of Board of Directors as the quarterly financial statements are not considered/adopted                     by the shareholders in the general meeting, though these are placed on the website of the company, filed with the stock                            exchanges, published in newspapers and circulated to the shareholders. Would it make any difference if these statements                     were put on the website but not published in newspapers or not circulated to shareholders individually?

 

        (b)        Whether the  audit report should also specifically state:

 

“The audit was conducted in accordance with the terms o f engagement as specified by the Board of Directors of the Company, and is not a statutory audit as per the requirements of the Companies Act, 1956”.

 

        (c)        Whether the suggested formats given at Annexures I and II are in order and can be followed for reporting on quarterly                              financial statements (subject to the addressee being specified).

 

C.        Points  considered  by  the  Committee

 

5. The Committee notes that clause 41 of the Listing Agreement of the Stock Exchanges, requires, inter alia, as follows:

 

“The Company agrees that it will furnish unaudited financial results on a quarterly basis with effect from the Quarter ending on March 31,2000 in the following proforma within one month from the end of quarter (Quarter means 3 months only) to the Stock Exchanges and will make an announcement to the Stock Exchanges where the company is listed, immediately within 15 minutes of the closure of the Board Meeting or Meeting of a Sub Committee of Board of Directors (consisting of not less than one third of the Directors), in which the unaudited financial results are placed and also within 48 hours of the conclusion of the Board or its Sub Committee Meeting in at least one English daily news paper circulating in the whole or substantially the whole of India and in one newspaper published in the language of the region, where the registered office of the company is situated.  The Board of Directors or its Sub Committee should take on record the unaudited quarterly results, which shall be signed by the Managing Director/Director. The company shall inform the Stock Exchange where its securities are listed about the date of the Board Meeting at least 7 days in advance and shall also issue immediately a press release in atleast one national news paper and one regional language news paper about the date of the aforesaid Board or its Sub Committee Meeting.

The company will have the option to publish consolidated quarterly financial results in addition to the unaudited quarterly financial results of the parent company as required under this clause.

  

In addition, the Company shall prepare the half yearly results in the same proforma with effect from half year ending on March 31, 2000 and the same shall be approved by the Board of Directors and subjected to a “Limited Review” by the Auditors of the Company (or by an y Chartered Accountant in case of Public Sector Undertakings) and a copy of the Review Report shall be submitted to the Stock Exchange within 2 months after the close of the half year. For the purpose of this Review half year shall be construed as consisting of the first two quarters of the Company’s Financial Year. In respect of the half yearly results, if the company intimates in advance to the Stock Exchange/s that it will publish audited half yearly financial results within two months of the close of the half year, then in such a case unaudited results and Limited Review need not be published/given

to the Stock Exchange/s.

 

In respect of results for the last quarter of the financial year, if the company intimates in advance to the Stock Exchange/s that it will publish audited results within a period of 3 months from the end of the last quarter of the financial year, in such a case unaudited results for the last quarter need not be published/given to the Stock Exchange/s”.

 

6. The Committee notes from the above requirements of clause 41 that while the listed companies have an option to publish audited half-yearly financial results instead of the requirements related to half-yearly financial results subjected to the limited review thereof, no option has been granted under the clause to furnish/publish audited quarterly or half-yearly complete set of financial statements.  In other words, in order to strictly comply with the requirements of clause 41, the company will have to furnish quarterly un- audited financial results and half-yearly financial results subjected to limited review  or  audited  half-yearly financial  results  in  the prescribed  format. Similarly,  the  company  has  an  option  to  publish  un-audited  quarterly consolidated financial results in addition to the un-audited quarterly financial results of the parent company.  The Committee is, accordingly, of the view that the company in question can furnish/publish quarterly and half-yearly complete set of financial statements on voluntary basis, but this will be in addition to and not in substitution of the quarterly/half-yearly financial results for compliance with the requirements prescribed in clause 41 of the Listing Agreement.

 

7. The Committee is of the view that audit of the complete set of financial statements  prepared  on  quarterly/half-yearly  basis  is  a  special  purpose assignment.  The  Committee  notes  that  paragraphs  10.1  and  10.2  of  the ‘Guidance Note on Audit Reports and Certificates for Special Purposes’, issued by the Institute of Chartered Accountants of India, recommend as follows:

 

“10.1 The reporting auditor may address his report or certificate to the client or to the public authority or person requiring it, as the case may be.  In appropriate circumstances, a certificate may be issued without reference to any particular person or authority by using the words, ‘To Whomsoever it May Concern’. 

 

10.2 The report or certificate should normally be issued to the client who should be responsible for forwarding the same to the concerned authority, where so required.”

 

8. On the basis of the above, the Committee is of the view that the audit report on quarterly/half-yearly complete set of financial statements should normally be addressed to the appointing authority, i.e., the board of directors. In case the board of directors request the auditor to address the report to the shareholders of the company, the reporting auditor should not address the report to the shareholders since the quarterly/half-yearly complete set of financial statements, along with the audit report, are not to be circulated amongst the individual shareholders as per the facts of the query. The report is normally addressed to the appointing authority and in this case the appointing authority is not the shareholders but are the board of directors.

 

9. As stated in paragraph 5 above, the company will have to furnish/ publish the quarterly/half-yearly financial results as per the requirements of clause 41 in newspaper and file with the relevant stock exchanges, even though the complete audited financial statements prepared on quarterly/half- yearly basis are published.

 

10. The Committee notes that format of audit report of quarterly/half-yearly complete set of financial statements has not been specifically prescribed either in the Listing Agreement or in the Companies Act or by the Institute of Chartered Accountants of India. The Committee is of the view that it would be desirable to include all aspects of the information to be disclosed and the matters to be reported upon as per the requirements of section 227(4) of the Companies Act, 1956 and the formats of the audit report for separate financial statements and consolidated financial statements, as prescribed by the Institute of Chartered Accountants of India (published in the April, 2002 and March, 2002 issues of the Institute’s Journal ‘The Chartered Accountant’, respectively). However, since such an audit assignment is a special purpose assignment, the board of directors may modify the reporting requirements in accordance  with the  terms of  engagement.   If it is  so, the same may be included in the report of the auditor.

 

D. Opinion

 

11. On the basis of the above, the Expert Advisory Committee is of the following opinion on the issues raised by the querist in paragraph 4:

 

        (a)        The audit report on stand-alone and/or consolidated complete set of financial statements should ordinarily be addressed to                      the board of directors. Since the quarterly/half-yearly complete set of financial statements are not proposed to be circulated                      amongst the individual shareholders, it does not appear appropriate to address the same to the shareholders. Further, the                      report is normally addressed to the appointing authority and in this case the appointing authority is not the shareholders but                      are the board of directors. The Committee wishes to add that the complete set of audited quarterly/half-yearly financial                      statements cannot be considered in lieu of the quarterly/half-yearly financial results in the prescribed format strictly in                              accordance with the requirements of clause 41 of the Listing Agreement.

 

        (b)        Yes, the audit report may specifically include the following:  

“The audit was conducted in accordance with the terms of engagement as specified by the Board of Directors of the Company, and is not a statutory audit as per the requirements of th e Companies Act, 1956.”

 

        (c)        As a matter of principle, the Committee is of the view that the audit report should include the matters covered in section                      227(4) of the Companies Act, 1956, and the formats of audit report for separate financial statements and consolidated                              financial statements prescribed by the Institute of Chartered Accountants of India (published in the April, 2002 and March,                      2002 issues of th e Institute’s Journal ‘The Chartered Accountant’, respectively) unless the appointing authority modifies                      the reporting requirements as per the terms of respective engagements. The annexures submitted by the querist should be                      viewed in the light of the aforesaid principles. The Committee is, further of the opinion that the audit should be conducted in                      accordance with the generally accepted auditing standards in India.

 

Annexure -  I

 

Format of Auditors’ Report as supplied by the querist for stand-alone quarterly financial statements of the company

 

We have audited the attached Balance Sheet of Company         A (the Company) as  at  _________,  and  the  Profit  and  Loss  Account  and  the  Cash  Flow Statement  of  the  Company for  the  quarter  then  ended,  annexed  thereto. These  financial  statements  are  the  responsibility  of  the  Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audit.

 

We  conducted  our  audit in accordance with  generally accepted  auditing standards in India.  Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis,  evidence  supporting  the  amounts  and  disclosures  in  the  financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. We report as follows:

 

        (a)        we have obtained all the information and explanations which to the best of our knowledge and belief were necessary for the                     purposes of our audit;

 

        (b)        in our opinion, proper books of account have been kept by the Company so far as appears from our examination of those                     books;

 

        (c)        the Balance Sheet and the Profit and Loss Account dealt with by this report are in agreement with the books of account;

 

        (d)        in our opinion, the Balance Sheet, the Profit and Loss Account and the Cash Flow Statements comply with the Accounting                     Standards issued by the Institute of Chartered Accountants of India, to the ext ent applicable; and

 

        (e)        in our opinion and to the best of our information and according to the explanations given to us, the said accounts give a true                     and fair view in conformity with the accounting principles generally accepted in India:

 

                        (i)         in the case of the Balance Sheet, of the state of affairs of the Company  as  at  ____________;

 

                        (ii)        in the case of the Profit and Loss Account, of the profit/loss of the Company for the quarter then ended; and

 

                        (iii)   in the case of the Cash Flow Statement, of the cash flows of the Company for the quarter then ended.

 

for <Name of the firm> Chartered Accountants Partner

Place

Date

     

Annexure  -  II

 

Format  of  Auditors’  Report  as  supplied  by  the  querist  on  the consolidated  quarterly  financial  statements  of  company  A  and  its subsidiaries

 

We have examined the attached Consolidated Balance Sheet of Company         A (the Company) and its subsidiaries, Company    B and Company           C as at _____, and the Consolidated Profit and Loss account and the Consolidated Cash Flow Statement for the quarter then ended.

 

These  financial  statements  are  the  responsibility  of  the  Company A’s management.  Our responsibility is to express an opinion on these financial statements based on our audit.  We conducted our audit in accordance with generally accepted auditing standards in India.  These Standards require that we plan and perform the audit to obtain reasonable assurance whether the financial statements are prepared, in all material respects, in accordance with  identified  financial  reporting  framework  and  are  free  of  material misstatements.   An  audit  includes  examining,  on  a  test  basis,  evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements. We believe that our audit provides a reasonable basis for our opinion.

 

We report that the consolidated financial statements have been prepared by the Company in accordance with the requirements of Accounting Standard (AS)  21,  Consolidated  Financial  Statements,  issued  by  the  Institute  of Chartered  Accountants  of  India and on  the basis  of  individual  financial statements of Company A and its subsidiaries audited by us and included in the consolidated financial statements.

 

On  the  basis  of  the  information  and  explanations  given  to  us,  and  on consideration  of  separate  audit  reports  on  individual  audited  financial statements of Company A and its subsidiaries, we are of the opinion that:

 

          (i)         the Consolidated Balance Sheet gives a true and fair view of the consolidated state of affairs of Company A and its                                 subsidiaries as at  __________;

 

          (ii)        the Consolidated Profit and Loss Account gives a true and fair view of the consolidated results of operations of Company                       A and its subsidiaries for the quarter then ended; and

 

          (iii)          the Consolidated Cash Flow Statement gives a true and fair view of the consolidated cash flows of Company A and its                       subsidiaries for the quarter then ended.

 

for <Name of the firm> Chartered Accountants Partner

Place

Date