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Thursday, September 30, 2010

SA Summary

Please download the SA Summary from:

Clause 49 Compliance (Corporate Governance)

Clause 49 of the Listing Agreement to the Indian stock exchange comes into effect from 31 December 2005. It has been formulated for the improvement of corporate governance in all listed companies.

In corporate hierarchy two types of managements are envisaged: i) companies managed by Board of Directors; and ii) those by a Managing Director, whole-time director or manager subject to the control and guidance of the Board of Directors.

  • As per Clause 49, for a company with an Executive Chairman, at least 50 per cent of the board should comprise independent directors. In the case of a company with a non-executive Chairman, at least one-third of the board should be independent directors.
  • It would be necessary for chief executives and chief financial officers to establish and maintain internal controls and implement remediation and risk mitigation towards deficiencies in internal controls, among others.
  • Clause VI (ii) of Clause 49 requires all companies to submit a quarterly compliance report to stock exchange in the prescribed form. The clause also requires that there be a separate section on corporate governance in the annual report with a detailed compliance report.
  • A company is also required to obtain a certificate either from auditors or practising company secretaries regarding compliance of conditions as stipulated, and annex the same to the director's report.
  • The clause mandates composition of an audit committee; one of the directors is required to be "financially literate".
  • It is mandatory for all listed companies to comply with the clause by 31 December 2005.

Corporate Governance may be defined as “A set of systems, processes and principles which ensure that a company is governed in the best interest of all stakeholders.” It ensures Commitment to values and ethical conduct of business; Transparency in business transactions; Statutory and legal compliance; adequate disclosures and Effective decision-making to achieve corporate objectives.In other words, Corporate Governance is about promoting corporate fairness, transparency and accountability. Good Corporate Governance is simply Good Business.

Clause 49 of the SEBI guidelines on Corporate Governance as amended on 29 October 2004 has made major changes in the definition of independent directors, strengthening the responsibilities of audit committees, improving quality of financial disclosures, including those relating to related party transactions and proceeds from public/ rights/ preferential issues, requiring Boards to adopt formal code of conduct, requiring CEO/CFO certification of financial statements and for improving disclosures to shareholders. Certain non-mandatory clauses like whistle blower policy and restriction of the term of independent directors have also been included.

The term ‘Clause 49’ refers to clause number 49 of the Listing Agreement between a company and the stock exchanges on which it is listed (the Listing Agreement is identical for all Indian stock exchanges, including the NSE and BSE). This clause is a recent addition to the Listing Agreement and was inserted as late as 2000 consequent to the recommendations of the Kumarmangalam Birla Committee on Corporate Governance constituted by the Securities Exchange Board of India (SEBI) in 1999.

Wednesday, September 29, 2010

Audit of Mutual Funds: Mutual Funds Constituents

AMC: A company that invests its clients' pooled fund into securities that match its declared financial objectives. These companies earn income by charging service fees to their clients.
Sponsor: The sponsor initiates the idea to set up a mutual fund. It could be a registered company, scheduled bank or financial institution. The sponsor appoints the trustees, AMC and custodian. Once the AMC is formed, the sponsor is just a stakeholder.
Trust/board of trustees: Trustees hold a fiduciary responsibility towards unit holders by protecting their interests. Sometimes, as with Canara Bank, the trustee and the sponsor are the same.

Tuesday, September 28, 2010

Clause 49 vs. SOX

A) Internal control:-

Clause 49(revised) :-

CEO/CFO accept responsibility for establishing and maintaining internal controls and that they have evaluated the effectiveness of the internal control systems of the company and they have disclosed to the auditors and the Audit committee, deficiencies in the design or operation of internal controls, if any, of which they are aware and the steps they have taken or propose to take to rectify these deficiencies. The role of audit committee is to review this internal control report.

Sec. 302 of Sarbanes-Oxley:-

The principle executive officer or officers and the principle financial officer or officers or persons performing similar functions have the responsibility of designing, establishing and maintaining the internal controls. Here in the Sarbanes Oxley Act the public company accounting oversight board will review the same and not the audit committee.

a. In Clause 49 the audit committee will review the internal control mechanism whereas as per the Sarbanes Oxley Act the public company accounting oversight board will review the same.

b. In Clause 49 Internal Control is only specified but no elaborative details are given about it whereas in Sec. 404 of the Sarbanes Oxley act the details regarding the same are specified.

B) Audit Committee composition:-

Section 301 of Sarbanes-Oxley:-

The committee (or equivalent body) established by the board of directors of the issuer for the purpose of overseeing the accounting and financial reporting processes of the issuer. If there is no such committee then entire board of director is considered to be the member of the audit committee. Each member of the company's audit committee must be a director and must otherwise be independent.

Clause 49 (revised) :-

1. The audit committee shall have minimum three directors as members.

2. Two-thirds of the members of audit committee shall be independent directors.

3. All members of audit committee shall be financially literate and at least one

member shall have accounting or related financial management expertise.

In Sarbanes Oxley act the number of directors constituting the audit committee is not specified. Also the frequency, the time gap between the meetings of audit committee is not specified. This points are clear in the Clause 49.

C) Independent Director:-

As per Sarbanes-Oxley:-

In order to be considered independent the one who does not

1. Accept any consulting, advisory or other compensatory fee from the issuer.

2. Be an affiliated person of the issuer or any subsidiary there of.

As per Clause 49 (revised) :-

For the purpose of the sub-clause (ii), the expression ‘independent director’ shall mean a non-executive director of the company who:

a. apart from receiving director’s remuneration, does not have any material pecuniary relationships or transactions with the company, its promoters, its directors, its senior management or its holding company, its subsidiaries and associates which may affect independence of the director;

b. is not related to promoters or persons occupying management positions at the board level or at one level below the board;

c. has not been an executive of the company in the immediately preceding three

financial years;

d. is not a partner or an executive or was not partner or an executive during the

preceding three years, of any of the following:

i) the statutory audit firm or the internal audit firm that is associated with the company, and

ii) the legal firm(s) and consulting firm(s) that have a material association with the company.

e. is not a material supplier, service provider or customer or a lessor or lessee of the company, which may affect independence of the director; and

f. is not a substantial shareholder of the company i.e. owning two percent or more of the block of voting shares.

As per the clause 49 the definition of the independent director is wider in scope than the one in Sarbanes Oxley Act.

Shareholders / Investors complaints:-

Sec. 301 of Sarbanes-Oxley:-

As per this section, each audit committee shall establish procedures for

1. The receipt, retention and treatment of complaints received by the issuer regarding accounting, internal accounting controls or auditing matters and

2. the confidential, anonymous submission by employee of the issuer of concerns regarding questionable accounting or auditing matters.

Clause 49 (revised) :-

Shareholders section in the disclosures of clause 49 states that:

A board committee under the chairmanship of a non-executive director shall specifically look into the redressal of shareholder and investors complaints like transfer of shares, non-receipt of balance sheet, non-receipt of declared dividends etc. This Committee

shall be designated as ‘Shareholders/Investors Grievance Committee’.

Sarbanes Oxley act mainly considers the accounts related queries whereas Clause 49 covers the topic in the broad sense.

E) Penal Provisions:-

Clause 49 (revised) :-

For violation of the listing agreement, Section 23E of Securities Contract Regulation Act, 1956 provides for a pecuniary penalty of upto Rs.25 crores-on the company.

Sec. 302 of Sarbanes-Oxley:-

For violation of Sarbanes-Oxley Act, Section 906 provides for fines and imprisonment of up to $ 1 million and 10 years for knowing violations of Section 906, and up to $5 million and 20 years for willful violations

F) Code of Conduct/Ethics:-

Section 406 of Sarbanes-Oxley:-

The act directs the companies to disclose if they have adopted code of conduct, if not, reasons thereof. Code of ethics for senior financial officers: Issuers shall adopt a code of ethics for senior financial officers, applicable to its principal financial officer and comptroller or principal accounting officer, or persons performing similar functions.

Clause 49(Revised):-

1.The Board shall lay down a code of conduct for all Board members and senior management of the company. The code of conduct shall be posted on the website of the company.

2. All Board members and senior management personnel shall affirm compliance with the code on an annual basis. The Annual Report of the company shall contain a declaration to this effect signed by the CEO.

3. For this purpose, the term "senior management" shall mean personnel of the company who are members of its core management team excluding Board of Directors. Normally, this would comprise all members of management one level below the executive directors, including all functional heads.

As per the above paragraph, in the Indian context, it will be obligatory for the board of the company to lay down a code of conduct for the board members and the senior management of the company. As per Sarbanes-Oxley restricts the code of conduct to be applicable to only 'principal financial officer and comptroller or principal accounting officer, or persons performing similar functions.

G) Public Company Accounting Oversight Board:-

As per the Sarbanes Oxley act, a Public Company Accounting Oversight Board has been set up to oversee the audit of listed companies in order to protect investors’ and public interest in matters relating to the preparation of audited financial statements.

There is no such provision in the Clause 49. In India the ICAI is legally empowered to carry out most of the regulatory, oversight and disciplinary functions outlined in the SOX Act (barring prosecution and levying of penalties). But the public perception is that the ICAI mechanisms are slow and the institute is not interested in adequately disciplining the members. In India the functions of PCAOB are carried out by various regulatory agencies viz. SEBI, RBI, ICAI, ICSI, ICWAI etc. If there were to be an Indian version of the PCAOB, then such powers would need to be withdrawn from the existing regulatory agencies and concentrated in the proposed public oversight board.

Monday, September 27, 2010

Peer Review

The peer review mechanism was established by the Council of the ICAI with the issuance of the Statement on Peer Review in March, 2002. Peer review will help in reassuring the stakeholders and the society at large that the profession is conscious of its responsibilities and strives at its best to ensure that the highest standards are observed by all the practising members rendering audit and attestation services to the society. It is to be noted that peer review report has nothing to do with the disciplinary or other regulatory mechanism. Under peer review one chartered accountant will examine the other chartered accountant to judge the quality of attestation work performed by them. The former is known as Reviewer and the latter is known as practice unit/ audit firm.

The main objective of peer review is to ensure that in carrying out their professional attestation service assignments, the members of the Institute:

(i) comply with the technical standards laid down by the ICAI;

(ii) have in place proper systems, including documentation systems, for maintaining the quality of the attestation services they perform.

The peer review is administered by Peer Review Board (PRB) constituted by ICAI. The Reviewer shall submit his report to PRB and necessary follow up action may be taken by PRB on such report.

Sunday, September 26, 2010

Peer Review: Some Finer Points

Can a reviewer visit clients of the PU?

Ans: No, he cannot , under any circumstances , communicate with or visit the clients’ of the PU

Can a reviewer visit branches of a PU?

Ans: Yes, he may visit a branch if the turnover of attestation functions of that branch is more than one million Rupees.

Basic Elements of Reviewer's Report

1. Title

2. Scope Paragraph

3. Opinion Paragraph

4. Limitations

5. Suggestions

6. Reference to preliminary report

7. Date of the report

Tuesday, September 21, 2010

Communication under Clause 8, Part I of First Schedule of CA Act

Illustrative Communication Letter under Clause 8, Part I of First Schedule


Mr. A

M/s XYZ & Associates,


Sub.: Statutory Audit of M/s Good Luck Company Private Limited.

Sir/ Madam,

We have been offered the appointment as statutory auditors of M/s Good Luck Company Private Limited by its management. In accordance with Clause 8 of Part I of the Schedule First to the Chartered Accountants Act, 1949, we would like to know from you, the reason(s), if any, for not accepting the aforesaid appointment.

An early reply at your end would be highly appreciated. Please acknowledge the receipt.

Thanking you,

Yours faithfully,


Prop./ Partner.

Tuesday, September 7, 2010

IFRS Preliminaries

India has decided to go for convergence route. Accounting Standard Board (ASB) of ICAI has already issued exposure drafts on all of the converged standards (Indian standards equivalent to IAS/IFRS). Once these Standards are approved by the Council of ICAI these will be sent to NACAS. On approval from NACAS, the same will need to be notified in the Gazette. Looking at the stringent timelines for roadmap of IFRS implementation in India, this process needs to be completed at the earliest.

Whether the converged standards will be called as IFRS??

No. The proposed name for converged standards in India is Ind-AS. The financial statements prepared under these standards will be called as Ind-AS financial statements.

What would happen to the existing set of accounting standards??

The existing set of Indian accounting standards will continue to be in force. These accounting standards will be applicable to those entities which are not required to migrate to Indian equivalent of IFRS (Ind-AS).

What is the time schedule for IFRS implementation in India??

The time schedule for compliance with the notified accounting standards which are convergent with IFRS (Ind-AS) and consequently preparing their opening balance sheet in compliance with the converged standards (Ind-AS) is as under:

For Companies other than Insurance, banking & NBFCs


Applicable to

Applicable from


· Companies which are part of NSE – Nifty 50

· Companies which are part of BSE – Sensex 30

· Companies whose shares or other securities are listed on stock exchanges outside India

· Companies, whether listed or not, which have a net worth in excess of Rs. 1,000 crores.

1st April, 2011


The companies, whether listed or not, having a net worth exceeding Rs. 500 crores but not exceeding Rs. 1,000 crores

1st April, 2013


Listed companies which have a net worth of Rs. 500 crores or less

1st April, 2014

For Insurance Companies, banking companies & NBFCs

Class of Companies

Applicable from

Insurance companies

1st April, 2012

Banking companies

· All scheduled commercial banks and those urban co-operative banks (UCBs) which have a net worth in excess of Rs. 300 crores

· Urban co-operative banks which have a net worth in excess of
Rs. 200 crores but not exceeding Rs. 300 crores

1st April, 2013

1st April, 2014

Non-Banking Financial companies

(a) Companies which are part of NSE – Nifty 50

(b) Companies which are part of BSE – Sensex 30

(c) Companies, whether listed or not, which have a net worth in excess of Rs. 1,000 crores.

All listed NBFCs and those unlisted NBFCs which do not fall in the above categories and which have a net worth in excess of
Rs. 500 crores

1st April, 2013

1st April 2014

Whether in the first year comparatives need to be given??

Companies covered in Phase I will prepare their financial statements for 2011-12 in accordance with the first set of Accounting Standards (i.e. the converged Accounting Standards) but will show previous years’ figures as per the financial statements for 2010-11, i.e., as per non-converged accounting standards.

However, the Companies will have an option to add an additional column to indicate what these figures could have been if the first set of Accounting Standards (i.e., converged accounting standards) had been applied in that previous year.

Whether companies covered in 2nd/3rd phase for application of the Ind-AS (i.e., the converged Accounting Standards) can voluntarily opt to apply the same w.e.f. accounting year beginning on 1-4-2011

Such Companies will have an option for application of the first set of accounting standards (i.e., the converged Accounting Standards) only for the financial year commencing on 1st April, 2011 or thereafter.

What is the cut off date for determining whether the companies fulfill the criteria for applicability for converged accounting standards (Ind-AS)

For testing the applicability for phase I, the date for determination of the criteria is the Balance Sheet as at 31st March, 2009 or the first Balance Sheet prepared thereafter when the accounting year ends on another date.

The cut-off date on which the aforesaid criteria shall be applied in order to determine the companies falling in each of the aforesaid four categories of companies will be the Balance Sheet as at 31st March, 2009 or the first Balance Sheet prepared thereafter when the accounting year ends on another date.

Computation of Net Worth:

The net worth will be calculated as under:

Share Capital

(+) Reserves excluding Revaluation Reserve

(-) Miscellaneous Expenditure

(-) Debit Balance of the Profit and Loss Account.

Further, it may be noted here that the criteria is to be applied to each company’s standalone accounts and not the consolidated accounts.

If the parent is covered in a particular phase, whether the subsidiaries, joint ventures or associates of parent would also be covered in the same phase??

The companies covered in a particular phase having subsidiaries, joint ventures or associates not covered in those phase/phases will prepare their consolidated financial statements according to Ind-AS (i.e., the converged Accounting Standards).

When one or more companies in a group fall in a phase other than the phase applicable to the parent company, they will continue to prepare standalone accounts according to the phase applicable to them but the parent will need to make amendments/adjustments to these accounts for the purposes of consolidation as per converged accounting standards. However, such subsidiaries, joint ventures or associate companies have the option for early adoption of converged accounting standards.

Once a company gets covered in the specified class of companies in any one of the phases and converts its opening Balance Sheet as per the specified date in accordance with Ind-AS, whether it would have to continue to follow the same set of accounting standards in the future as well even if it no longer satisfies the specified criteria

Yes, once a company starts following the Ind-AS (i.e. the converged Accounting Standards) on the basis of the eligibility criteria, it will be required to follow such Accounting standards for all the subsequent financial statements even if any of the eligibility criteria does not subsequently apply to it.

Is it permissible to adopt IFRS rather than Ind-AS

In case the notified converged accounting standards (Ind-AS) are not fully consistent with the IAS/IFRS, as issued by the IASB, it is presumed that Indian companies will continue to follow the Ind-AS (i.e., converged accounting standards) as notified by the Government of India and not the IFRS as issued by IASB.