SEBI: Submission highlighting issues in disclosure requirements in case of initiation of forensic audit on listed companies
Blog: NASSCOM Official Blog
As you may be aware, Securities Exchange Board of India (SEBI) recently issued Press Release No. 52/2020 dated September 29, 2020 which mandates listed companies to make disclosure to stock exchanges in case of initiation of forensic audit as well as the final audit report and comments of the management, once the audit is completed.
As a result, following issues could arise:
A. Issues in disclosure of initiation of forensic audit of listed company:
- The requirement of disclosure in case of initiation of forensic audit to stock exchanges can be detrimental to independent conduct of company’s affairs. For example, in case the investigation results in no fraud/wrong doing, a premature disclosure will impact the reputation of the company, thereby resulting into undue damages to the company.
- It may mislead investors, thereby leading to market capital erosion for the company, or cause fluctuation in price or trading patterns in the shares of the company. This can also result in reputational and financial damage to the company
- The practice of disclosure of initiation of forensic audit is unprecedented and is not recommended under regulatory regime of other countries. This is also against the current disclosure requirement prescribed by SEBI under Chapter 2 of SEBI (Listing Obligations and Disclosure Requirements) regulations, 2015 (SEBI LODR) on “Principles governing disclosures and obligations of listed companies”.
- Chapter 2 of SEBI LODR provides that a listed company is obligated to disseminate accurate, adequate and timely information to the investors, and refrain from misleading or misrepresenting to the investors/ stock exchanges.
- All events/ information that are ‘deemed to be material’, and enumerated in Schedule III, Part A, Para A of the LODR require disclosure only once a decision has been taken or an outcome has been reached with finality.
B. Issues in disclosure of forensic audit report:
- The requirement of disclosure of forensic audit report will lead to dilution of independence of companies’ boards.
- Forensic audits may cover both financial and non- financial matters. Example- non- financial matters like recruitment practice adopted by the company may also be subjected to forensic audit. Requiring companies to disclose all such information, which may be frequent, will be onerous and may lead to undue burden on the company.
In this regard, NASSCOM has made a representation requesting SEBI to re-consider the disclosure requirements prescribed in the press release and instead require listed companies to share a summary of forensic audits only on conclusion of the audit, in case any wrong doings are found. Further, we also request that such disclosure obligations should not be made applicable to any internal investigations initiated by the company.
We will keep you posted on further developments in this regard.
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