CORPORATE houses will soon lose the leeway they have in getting away with errors they detect in previous years’ financial statements. From April 2010, a company will have to restate the profit and loss account for a past year in case it subsequently detect an error — something the investors and regulators may not take lightly.
Today, companies need to offer only a clarification for the error in a past-year financial statement. Restatement of profits, which is the norm internationally, in case of a mistake in the past profit and loss account will become mandatory in the country as companies prepare their statements in April 2010 as per International Financial Reporting Standards (IFRS). Both IFRS and US GAAP call for restatement of profits while the Indian accounting standards do not.
“Investors make their judgement about a company based on the figures disclosed. If the company restates a previous year’s profits, the investor may get confused. Besides, this could invite the attention of regulators on whether the management and the auditor of the company have played their roles satisfactorily. Globally, restatement of profits is seen in poor light,” IFRS expert and KPMG executive director Jamil Khatri said. Almost 6% of companies listed on US stock exchanges end up restating profits.
After the accounts have been finalised, the company’s board of directors approves it first, followed by the auditors and shareholders. The statements are then filed with the registrar of companies and the tax authorities. If the changes made subsequently are significant, it is likely the authorities may ask tough questions.
Although IFRS compliance becomes compulsory from April 2011, the balance sheet for the preceding year too has to be in the IFRS format so that both could be compared. This means the effective compliance date is one year earlier than originally believed. Besides, accounting regulator ICAI recently urged companies to adopt IFRS as early as possible as it would present a clearer and accurate picture of the company’s financial health.