`Limited review' of interim results -- Does it serve any purpose?

Raghuvir Srinivasan

AS PART of improvement of the corporate governance and disclosure standards in the country, the Securities and Exchange Board of India (SEBI) decreed last March that all half-yearly results of listed companies must be subject to a ``limited review'' by the auditors.

The regulator incorporated this as part of Clause 41 of the Listing Agreement that companies sign with stock exchanges. The effect of this step will begin to be felt in the next few weeks when companies begin releasing their results for the first half of fiscal 2000-01.

Exhibiting rare alacrity, the Institute of Chartered Accountants of India has quickly followed up on SEBI's move, with a Guidance Note to its members on the subject. The Guidance Note explains the procedure to be followed by auditors while giving a ``limited review'' report apart from setting out its format.

Negative assurance: The first in India

As per the Guidance Note, for the first time in the country, auditors will be required to give a ``negative assurance'' to shareholders on the accounts they have ``reviewed''. According to the format of a Review Report set out in the Note, the auditor declares: ```Based on our review as aforesaid, nothing has come to our attention that causes us to believe that the accompanying financial statements do not give a true and fair view in accordance with accounting standards, other recognised accounting policies and practices and relevant statutory requirements.''

Simply put, the auditor states that based on the tests carried out by him on the accounts, there is nothing to suggest that the balance sheet and profit and loss account do not give a true and fair view of the state of affairs of the business. In contrast to this, the prevailing audit report on the annual accounts gives a positive assurance. It says categorically that the financial statements offer a true and fair view of the state of affairs of the business.

If the shift to ``negative assurance'' gives you a queasy feeling that the auditor is unwilling to stick his neck out, read further. The Review Report to be given by the auditor grandly declares that ``these financial statements are the responsibility of the company's management.'' This is but stating the obvious, you may say. And again, there is no such statement in the audit report annexed to the annual accounts at the end of every year, even though they are the responsibility of the management too. So what is it that the ICAI is trying to say? Could it be that by stating the obvious, the ICAI is reminding users of the financial statements that they accept no responsibility for the numbers therein?

There are more interesting paragraphs in the Review Report. The auditor will grandly declare that ``We conducted our review to obtain moderate assurance as to whether the financial statements are free of material misstatements. A review is limited primarily to inquiries of company personnel and analytical procedures applied to financial data and thus provides less assurance than an audit. We have not performed an audit and, accordingly, we do not express an audit opinion.''

What then is the Report all about? If it is not an audit opinion then what is it? Why such a report at all? The audit community may have a thousand reasons to justify why it is not an audit opinion. But that hardly offers any comfort to the shareholder who depends on such opinion. Again, what does ``moderate assurance'' mean? Is there a definition for the phrase? If anything, such vague phraseology would only serve to strengthen the prevailing opinion, right or wrong, that auditors as a species, duck responsibility when it comes to offering an assurance on the financial statements. But that is a different issue altogether.

Getting back to the concept of a ``limited review'', one question that begs answer at the end of it all is: What will be the purpose served by such a review? Whom is the SEBI (and the ICAI) trying to satisfy by the whole exercise? If the answer is the common investor-shareholder, then what is being done now is certainly not enough. The test that should be satisfied is: Will a ``limited review'' enhance the comfort level of the investor with the financial statements?

The format of the above report will obviously not offer any comfort to the common investor. If the SEBI's objective is to make sure that companies do not resort to hanky-panky while declaring mid-term results, then it would probably be better to ask for a complete audit of the financial statements rather than such ``limited reviews'' which are neither here nor there.

These days, audits are hardly done for just a couple of months at the end of the year. It is a concurrent process and most audit firms keep up with their clients on a real-time basis for practical reasons. Given the size and volume of business activity these days, the old concept of audit being an activity at the end of the accounting period is no longer valid. Besides, market-sensitive information such as earnings growth and market-shares are sought for and disseminated on a real-time basis and therefore, the auditor is also expected to keep track of the client's books closely almost on a daily basis.

In such a situation, it may not be very difficult for auditors to give out complete audit reports for interim financial statements too. Even with annual audits now, the major companies come out with their audited accounts by the end of May, just two months after the fiscal year ends. So the auditor is now fairly well-versed in working against a stiff deadline and delivering a satisfactory report. There is no reason why he cannot repeat it every six months. If anything, it will make his year-end job easier.

The SEBI should re-examine the concept of ``limited review'' and do one of two things -- suggest a complete audit with a report containing an audit opinion or just leave it to the market to decide for itself the veracity of the numbers. Half-way houses such as ``limited review'' do justice neither to the shareholder, nor to the company and of course, certainly not to the auditor himself. If he is going to do all the comprehensive tests suggested in the Guidance Note of the ICAI, then he might as well give a comprehensive audit opinion.