The accountability for ensuring ‘true and fair view’ in financial statements is now shared among all stakeholders, including the CFO, auditors, audit committees, and Board members. With SEBI and NFRA tightening the regulatory framework, stakeholders can no longer afford to take compliance lightly.
Ensuring True and Fair View in Financial Statements: One of the most critical communications between a company and its shareholders is through its financial statements. These documents are fundamental for shareholders, providing insights into the financial health of the company and influencing their decision to stay invested. Recognizing the importance of financial statements, regulators ensure their issuance is highly regulated and scrutinized. Section 129 of the Companies Act, 2013 (CA 2013), mandates that financial statements must present a ‘true and fair view’ of the company’s state of affairs, comply with accounting standards under Section 133, and follow the prescribed format in Schedule III of CA 2013.
Key Stakeholders in Financial Statement Preparation
The preparation and certification of financial statements involve multiple stakeholders, including:
- Company Management: Responsible for preparing financial statements in accordance with applicable accounting standards.
- Statutory Auditors: Tasked with auditing the statements and issuing a report under Section 143(2) of CA 2013, confirming that the financials reflect a ‘true and fair view’ to the best of their knowledge.
- Audit Committee: Reviews the finalized financial statements to ensure compliance with applicable standards and accuracy.
- Board of Directors: Approves the financial statements based on the audit committee’s recommendations. Under Section 134(5), the Board signs the Directors’ Responsibility Statement, confirming:
- Compliance with accounting standards.
- A ‘true and fair view’ of the company’s state of affairs.
- Adequate measures to safeguard company assets and prevent fraud.
- Preparation of accounts on a going concern basis.
- Effectiveness of internal financial controls (for listed companies).
Role of CEOs and CFOs in Listed Companies
For listed entities, the Chief Executive Officer (CEO) and Chief Financial Officer (CFO) are required under Regulation 17(8) and Part B of Schedule II of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (SEBI LODR) to furnish a compliance certificate. This certificate confirms:
- Financial statements are free from material misstatements and comply with accounting standards.
- Transactions are lawful and adhere to the company’s code of conduct.
- Internal controls for financial reporting are effective and adequately maintained.
- Significant changes in financial policies or instances of fraud are communicated to the audit committee and auditors.
‘True and Fair View’: A Complex Responsibility
Despite the legal emphasis on ‘true and fair view’, neither CA 2013 nor SEBI LODR explicitly defines the term. However, the Supreme Court in J.K. Industries Limited v. Union of India clarified the term “True and Fair View” as follows:
“That the financial statements must:
- Be prepared accurately.
- Reflect the company’s true state without creating a misleading impression.”
In the event of non-compliance, determining responsibility can turn into a blame game among the CFO, statutory auditors, audit committee, and Board of Directors.
Legal Framework and Penalties
Section 129(7) of CA 2013 holds the managing director, CFO, or any designated person responsible for non-compliance. In their absence, the entire Board can be held liable. Independent directors, however, enjoy limited liability under Section 149(12), which protects them unless they consented to or failed to act diligently regarding non-compliance.
Similarly, Regulation 25(5) of SEBI LODR limits the liability of independent directors to acts of omission or commission occurring with their knowledge or due to lack of diligence. Yet, SEBI often imposes penalties under Section 15HB of the SEBI Act for failure to meet compliance standards. It also invokes Section 27, which establishes vicarious liability for directors and key managerial personnel.
Case Studies: Lessons from SEBI Actions
- LCC InfoTech Limited:
- SEBI penalized the CEO, CFO, and independent directors for approving misstated financial statements and furnishing false compliance certificates. Each independent director faced fines under Section 15HB for negligence.
- Bombay Dyeing and Manufacturing Company Limited:
- Independent directors and CFOs were fined for failing to ensure accurate financial reporting. SEBI also explored using the SEBI (Prohibition of Fraud and Unfair Trade Practices) Regulations, 2003 (FUTP Regulations) to penalize financial manipulation.
Stricter Oversight by NFRA and SEBI
The National Financial Reporting Authority (NFRA), established under Section 132 of CA 2013, has intensified scrutiny of auditors, imposing heavy penalties and debarments for lapses. SEBI, on the other hand, has adopted a zero-tolerance approach toward misleading financial statements, ensuring accountability at all levels.
Concluding Thoughts
The accountability for ensuring ‘true and fair view’ in financial statements is now shared among all stakeholders, including the CFO, auditors, audit committees, and Board members. With SEBI and NFRA tightening the regulatory framework, stakeholders can no longer afford to take compliance lightly. Audit committees must prioritize financial integrity, as reliance on passing the buck is no longer viable. India Inc. is moving toward a more robust and transparent financial reporting ecosystem, demanding greater diligence and responsibility from all involved. The ultimate solution is a collective commitment to upholding the sanctity of financial reporting and governance.
Ref: Section 129 of Companies Act 2023
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