Module: 4
Financial Standards and Codes: Report of Advisory Group on International Accounting and Auditing

Implementation of Accounting Standards

As the formulation of accounting standards is only a means to an end, the ultimate objective should be the acceptance and implementation of the standards. While the last two decades have witnessed significant efforts in the formulation of accounting standards, meaningful steps for their implementation are of comparatively recent origin.

Until recently, implementation was enforced only upon the auditing profession which was subjected to the disciplinary jurisdiction of the ICAI. Under directives issued by the ICAI, auditors were required to report in their audit reports whether the accounting policies followed by the auditee are at variance with the applicable accounting standards. However, there was no obligation cast on the preparer of the financial statements to comply with accounting standards.

The amendment to the Companies Act in 1998 has now imposed that obligation. As a result of the amendment, every balance sheet and profit and loss account prepared by a company and laid before its members at the Annual General Meeting is required to be prepared in accordance with the prescribed accounting standards. In the event of a deviation from the standard, the fact of the deviation, the reasons therefor and the financial impact, if any, of the deviation have also to be disclosed. In addition, the auditor is required to report whether in his opinion the profit and loss account and balance sheet comply with the prescribed standards. This is a giant step forward in the implementation of standards. However, as with other provisions, the regulatory authority, viz., the Department of Company Affairs, through the Registrars of Companies remains weak in its ability to enforce compliance and audit qualifications, in this and other matters, abound with little or no regulatory action.

An equally significant development is the establishment by the Securities and Exchange Board of India (SEBI) of a Standing Committee on Accounting Standards. This committee monitors the existence of relevant accounting standards and their harmonisation with the corresponding International Accounting Standards. It mandates the adherence to standards and enforces the same through the listing agreements between the companies and stock exchanges. Therefore, atleast in so far as listed companies are concerned, a better enforcement mechanism has been put in place.