Section 227 of the Companies Act 1956 requires an auditor to express an opinion on if the balancesheet presents a true and fair view of the state of the company’s affairs at the end of the financial year and whether the profit and loss account presents a true and fair view of the profit or loss for the financial year. It also requires an auditor to state specifically whether, in his opinion, the profit and loss account and the balance sheet comply with accounting standards. Auditing and Assurance Standard (AAS) 28 requires the auditor to express an opinion on whether “the financial statements give a true and fair view in conformity with the accounting principles generally accepted in India”.
The law requires the auditor to express an ‘opinion’ and therefore, an auditor should not adopt the ‘check list’ approach. This is more so, because India has adopted the ‘principle based’ approach, rather than the ‘rule-based’ approach in formulating accounting standards. However, some auditors adopt the ‘check list’ approach, which causes hurdles in adopting superior accounting principles and methods by companies.
Accounting standards
From the beginning, India decided to benchmark its accounting standards with IFRS. All through, IFRS (erstwhile IAS) was the starting point in formulating accounting standards. Therefore, it may not be incorrect to say India always pursued the policy of convergence with IFRS. However, India did not keep pace with the IASs, while new IASs were issued. It is difficult to guess if the decision not to revise Indian accounting standards in line with revised IASs was deliberate was just inability of ICAI to keep pace with developments in international accounting practices. ICAI never articulated the reasons for widening gap between the IFRS and the Indian GAAP. It is quite possible the Indian companies and the accounting profession were not comfortable with new accounting principles stipulated in revised IASs and therefore, in the interest of the industry, ICAI adopted the go-slow policy in revising accounting standards. It is a fact there was no urge to adopt IASs because only a few companies could attract foreign capital. Whatever be the reasons, India adopted a lacklustre approach in catching up with developments in accounting practices in the global arena.
Situation has changed since India decided to meet full convergence of Indian accounting standards with IFRS. Soon, many exposure drafts were issued and those are still floating. Proposed changes will bridge the gap between Indian standards and extant IFRSs.
The set of accounting standards, notified by the Ministry of Corporate Affairs, is a part of company law. Therefore, accounting standards applicable at the balancesheet date be applied in the preparation and presentation of financial statements. This is the correct position. The government has not notified any revised or new accounting standards since 2006. This has put many in a predicament. They cannot adopt better and globally accepted accounting practices and methods, acknowledged by the government and the ICAI by deciding to converge Indian accounting standards with the same, because those are yet to be enacted as law in India.
Principle versus rules
Indian accounting standards are principle based. Therefore, it is appropriate companies be allowed to formulate accounting policies based on principles and methods in IFRSs, so long they are not in conflict with accounting principles and methods stipulated in Indian standards or their use is not prohibited by accounting standards or any other law. Some auditors, who adopt the ‘check list’ approach, are not comfortable with this. They believe, any deviation from ‘accounting principles generally accepted in India’ should lead to qualification in audit report. A case in point is the accounting for expenditure incurred on ‘inspection and overhaul’ of an item of property, plant and equipment, for example, of an aircraft. Indian companies recognise the expenditures as expenses. IFRS specifically requires capitalisation of those expenditures and principles stipulated in Indian Accounting standard is not in conflict with IFRS requirement. But some auditors believe an accounting policy to capitalise those expenditures is a deviation from the Indian accounting standard.
There is a need to change the mindset of auditors who adopt the ‘check list’ approach.
E mail: asish.bhattacharyya@gmail.com
