Confusions and rumours are over. Salman Khurshid, Minister of State for Corporate Affairs, recently announced that India will adopt a new set of accounting standards, which are fully convergent with IFRS, from april1, 2011. Compliance with new accounting standards will significantly change the accounting practices in India and will align Indian accounting practices with global accounting practices. This will enhance the confidence of investors in financial statements issued by Indian companies. There are many in the accounting profession and in the corporate world who opposed the early implementation of accounting standards fully convergent with IFRS.
There were many arguments some are trivial like if USA can decide to adopt IFRS after the year 2014, what is the hurry to implement IFRS in India. The others are serious like fair value accounting will lead to large scams. It goes to the credit of the government that it has decided to stick to the well thought out road map issued by it earlier. New set of accounting standards will increase disclosure requirements, which will improve corporate governance.
It is true that there will be teething problems. But India has the capability to overcome them quickly. We have seen ability of Indian companies to manage business in a new economic environment when India opened up the economy. Indian companies demonstrated their capability to take advantages of opportunities emerged from the restructuring of the economy and to compete equally with global leaders. Indian accountants and auditors will demonstrate similar capabilities in the new accounting environment. A positive externality that will arise is that India will be able to contribute significantly in formulation of IFRS as learning from implementing new accounting standards will help the accounting profession to identify issues in implementing IFRS in an emerging economy like India.
This change in accounting practices will enhance the responsibilities of the audit committee and the auditor. It will be a challenge to ensure the integrity of corporate financial reports.
Accounting will move away from historical cost. Some assets and liabilities will be measured at the fair value or market value. Moreover, the concept of ‘substance over form’ will be applied extensively. This will enhance the value of information content in financial statements. However, this will increase the complexity of measurement principles and methods as preparers will have to exercise considerable judgement. Auditors will also be required to exercise judgement in verifying estimates arrived at by the management.
Auditors will be required to be more skeptical in auditing financial statements prepared under the new set of accounting standards. Audit committees will be required to understand the reasonability of underlying assumptions for each estimate, which is not based on historical cost. Communication between the audit committee, the internal auditors and the external auditor need to be strengthened. The expectations of investors and other users of financial statements from audit committee and auditors will increase.
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On January 7, 2011, the Financial Reporting Council (FRC) of UK has issued a discussion paper entitled ‘Effective Company Stewardship – Enhancing Corporate Reporting and Audit’. The paper makes few significant recommendations relating to the audit committee and the audit of financial report. The paper recommends that in order to enhance transparency, the annual report should include a complete report from the audit committee explaining, in particular, how they discharged their responsibilities for the integrity of the Annual Report and other aspects of their remit (such as their oversight of the external audit process and appointment of external auditors).
The paper further recommends an expanded audit report that should include a separate new section on the completeness and reasonableness of the Audit Committee report. In addition, the expanded audit report should identify any matters in the Annual Report that the auditors believe are incorrect or inconsistent with the information contained in the financial statements or obtained in the course of their audit. Those recommendations deserve serious debate.
We may expect audit committees of enlightened companies to voluntarily prepare a complete report as suggested in the discussion paper and will allow the auditor and large or prominent investors to review the same. This will benefit the audit committee to improve its functioning and to provide assurance to investors that it is functioning efficiently and effectively.