Being part of the BSE Sensex and the NSE Nifty is a privilege for a company, a sign that you have arrived. Apart from the snob value, it gives a relative boost to a company’s market capitalisation.
Since there are derivatives and index funds tracking these indices, fund managers add the stock to their portfolio. But the fifty odd companies who make up the Nifty (50 stocks) and Sensex (30 stocks) will be under scrutiny. Other companies too will be picked up at random. The scrutiny follows a meeting of Sebi’s Committee on Disclosures and Accounting Standards (Scoda) on Jan 9, to decide on steps to improve investor confidence, post-Satyam. The decision was to conduct a peer review of financials.
All the working papers of auditors (relating to the financial statements) will be placed before this committee. This will be taken up after the December quarter results and the review will be completed by February 2009. The panel will look at the latest annual results’ audit working papers too. It would have been better if the auditors had taken the September 2008 results, catching companies unaware.
Doing a peer review is one thing but the terms of reference should be quite explicit. What happens after the peer review has not been made clear. What powers will this committee have and how will they ensure adequate responses to queries put forth by the review team. But there will be enough for them to question, if they wish to. They can begin with income recognition, particularly for real estate companies. And for all companies, is the operating income really operating in nature?
Recognition of expenses: are companies capitalising some of their expenses? Take interest expense accrued on FCCBs. Then, they can come to forex assets and liabilities. Some companies have openly defied the new accounting standard that mandates companies to mark to market their forex liabilities and assets and show the profits or loss in their P&L. Auditors merely make a foot note of it, should they be qualifying the accounts and in some cases, insist that the accounts be remade.
Then, they can look at whether segment reporting is being followed in its true spirit. Many companies refuse to split their business revenues and profits, by claiming it is one segment. Some companies write copious notes to their quarterly results which are helpful yet others say nothing. Why does that happen? There is a lot the peer review panel can unearth. The question is what will they do with it.