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Sunday, August 7, 2011

The reason why public sector company audits take so much time.

This term, my friend and I were doing a project to rank annual reports of Nifty companies. While the private sector cos(barring R-ADAG group cos) have largely released their annual reports within 4 months from year end, public sector companies have not. Only SBI(being a bank thereby subject to 'peer pressure' of releasing accounts within 1 month) has done so, while blue chips like ONGC have not. Why is this so? One cannot even blame the respective Government department for that, because these companies have substantial functional autonomy, and have functioning Board of Directors to approve the accounts.
The reasons are
  1. C&AG issues additional guidelines to the statutory auditor(http://cagofindia.delhi.nic.in/caempanel/directions_2010.htm). Most of these points are anyways checked within the scope of most well planned audits, but some of these guidelines involve substantial elements of operational audit, performance audit and 100% check-which all eats up large amount of time.
  2. Also, while the auditee PSU is bound to provide all information expediently(http://cagofindia.delhi.nic.in/caempanel/annexure-terms2011.htm), the draft audit report must be approved by the C&AG Audit Boards, which may seek the audit working papers as well. This ability to requisition working papers routinely, is unique to such audits, and makes the auditor wary of even the smallest mistakes, thus reducing the materiality limits. 
  3. The C&AG may take its own time to approve the draft audit report, adding its own comments later
  4. Once the accounts are finalized, the concerned Ministry then kicks in with its demand of dividends(as per Finance Ministry edicts). This negotiations with PSU management eats up more time. 
Therefore, delayed circulation of annual accounts for PSUs is not a sign of poor accounting/corporate governance, but is a systemic issue. Investors should keep this in mind. 

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