Sunday, March 23, 2008

There is an urgent need to converge accounting standards

During a conversation a decade ago with a senior regulator on the prevalence and acceptance of qualified audit reports in India, the regulator remarked “Why would a qualified audit report be considered undesirable? I would have thought a ‘qualified’ audit report would mean that the audit report or the auditee had some additional attributes, just like we speak of a ‘qualified person’. This one incident etched in my mind all that bedevils India when it comes to stakeholder’s understanding of an audit report or placing confidence thereon.

Globally, audit reports are unqualified, meaning that the auditor would without any reservation express his confidence on fairness of the financial statements. Issuance of a qualified opinion, globally, is in the rarest of rare scenarios only. However, in India, convention, practice, and business usages have combined in a manner in which a ‘qualified audit opinion’ is an extremely common occurrence.

A number of these qualifications arise because the auditor wants to play safe since the past history of regulatory action does not provide confidence of regulators appreciating the ‘materiality’ aspects of reporting. While Audit works on a framework of designing processes and finally reporting results based on materiality thresholds which are linked to the size of the entity and its results, regulators and external reviewers in India tend to stray far from such a materiality driven approach.

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