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Wary Auditors Issue ‘Emphasis of Matter’ Statements to Flag Likely Financial Risks

For investors, it’s a new place in an annual report where they can find clues to financial risks facing a company that are currently under the radar but could snowball into something big. For auditors, it’s a way to insulate themselves from a future backlash, even censure, on the quality of their audit.

An increasing number of auditors in India are issuing a new category of qualifications in their audit reports addressed to shareholders. Termed as ’emphasis of a matter’ statements, these typically appear just before the regular qualifications and are highlighted in italics. “We find it useful to discern matters of significance,” says Shriram Subramanian, founder and managing director, InGovern Research Services, which gives independent advice to shareholders on company actions.

Unlike auditor qualifications, which are notings made by an auditor on issues it disagrees with the management on, emphasis comments are notings the auditor is in agreement with the management on how a transaction is treated but is not sure about its future impact. For example, in the 2012-13 annual report of JK Cement, audit firm PL Tandon & Co has, via an emphasis comment, pointed out that the company has not made any provision for a 128-crore penalty imposed on it by the competition regulator for anti-trust practices.

The accounting regulator formally notified revised emphasis comments in April 2012, and the annual reports reaching the shareholders now would be the second lot in which auditors are making this separate category of qualifications.

Auditors have been issuing emphasis comments for a few years, but the numbers have shown a rapid increase after the notification by the Institute of Chartered Accountants of India ( ICAI).

Exact numbers are unavailable, but Jamil Khatri of KPMG estimates that accounts of at least 25 companies, if not more, would show such notings in the BSE-500 set, compared with three or four about five years ago. “Earlier, it was rare to see an emphasis comment,” says Khatri, global head of KPMG’s accounting advisory services. In the past two years, the auditors of Cairn India, DLF, GVK Power, JK Cement, JSW Energy, Lanco InfratechBSE -1.43 %, Raymond, Tata Global BeveragesBSE -1.40 %, Tata PowerBSE 2.25 % and Unitech, among others, have qualified their accounts with emphasis comments.

In recent times, auditors have come under greater scrutiny for the quality of audit performed. This is especially so in the wake of the 2009 scam in Satyam Computer Services, where the company overstated its cash by $1 billion, under the nose of its auditor PricewaterhouseCoopers (PwC) India.

According to N Venkatram, managing partner (audit), Deloitte Haskins & Sells, an audit firm, auditors are increasing the use of emphasis comments to draw attention to matters which, in their judgement, are fundamental to the understanding of financial statements. “This is influenced by the increased expectations of the auditor,” he adds. “In such situations, the auditor’s professional judgement on the importance of the matter is key. Auditors can, of course, use this in self-defence if questioned at a later date, as such emphasis highlights matters of importance that do not require audit qualification.”

http://economictimes.indiatimes.com/news/news-by-industry/services/consultancy-/-audit/wary-auditors-issue-emphasis-of-matter-statements-to-flag-likely-financial-risks/articleshow/21153538.cms

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