Amendments in Listing Agreement to provide for manner of dealing with Audit Reports of the listed Companies

In order to enhance the quality of financial reporting, SEBI vide its Circular No. CIR/CFD/DIL/7/2012 dated August 13, 2012 has made some amendments in the Equity Listing Agreement, providing for the manner of dealing with Audit Reports filed by listed companies.

The same may be summarized as below:

1. Listed companies will now be required to submit the following forms, along with copies of annual reports submitted to stock exchanges

• Form A: Unqualified/ Matter of Emphasis Report
• Form B: Qualified/ Subject To/ Except For Audit Report

2. These forms shall be signed by:

1. Chief Executive Officer / Managing Director,
2. Chief Financial Officer,
3. Auditor and
4. Chairman of the Audit Committee

3. Stock exchanges shall adopt the following procedure to process the audit reports accompanying audited annual financial statements submitted by listed companies along with Form B:

1. Stock exchanges shall carry out preliminary scrutiny of reports accompanied by Form B including seeking necessary explanation from the listed company concerned and consider the same based on materiality of the qualifications. The parameters for ascertaining the materiality of audit qualifications shall be the impact of these qualifications on the profit and loss, financial position and corporate governance of the listed company. For the purpose of uniformity, stock exchanges shall consult one other for deciding the criteria for preliminary scrutiny. Further, stock exchanges shall also consult one other for distributing the work in case shares of the listed company concerned are listed on more than one stock exchange.
   
   
2. Upon examining the audit reports based on the above parameters, stock exchanges shall refer those cases, which, in their opinion, need further examination, to SEBI.
   
   
3. SEBI has constituted the ‘Qualified Audit Review Committee’ (QARC) with representatives from Institute of Chartered Accountants of India (ICAI), stock exchanges, etc. The QARC shall review the cases received from the stock exchanges and guide SEBI in processing the qualified annual audit reports referred to by the stock exchanges.
   
   
4. After analyzing the qualifications in audit reports, QARC may make following recommendations:

• If, prima facie, QARC is of the view that an audit qualification is not significant, it may suggest steps for rectification of such qualification;
• If, prima facie, QARC is of the view that an audit qualification is significant and the explanation given by the listed company concerned / its Audit Committee is unsatisfactory, the case may be referred to the Financial Reporting Review Board of ICAI (ICAI-FRRB) for their opinion on whether the qualification is justified or requires restatement of the books of accounts of the listed company;
• If an audit qualification is not quantifiable, QARC may suggest rectification of the same within a stipulated period.

5. If ICAI-FRRB opines that an audit qualification is justified, SEBI may ask the listed company concerned to restate its books of accounts in compliance with the statutory requirements and inform its shareholders about the same by making an announcement to the stock exchanges.
   
   
   SEBI may also direct the listed company concerned to reflect the effect of these restatement adjustments in the annual report of the subsequent financial year.
   
   
6. If ICAI-FRRB is of the view that an audit qualification is not justified, ICAI may ask the statutory auditor of the listed company concerned to provide necessary clarifications and may take appropriate action.
   
   
7. The scrutiny of all audit reports filed as per Form B shall be carried out twice a year based on the reports received up to half year ending on June and December of every year.