Saturday 14 December 2013

I stand vindicated – With XBRL you really can’t hide

“With XBRL you cant hide”, this was something I stated in my previous article. Here, I stand vindicated.

The study has thrown up some startling findings. The study has shown that more than 200 listed Indian companies have discrepancies in their annual audited financial results. The discrepancies are such that the numbers simply do not add up. The numbers in the schedules should tally with the total reported for the corresponding item in the main balance sheet or the P&L statement as the case may be. For these 209 companies, they just don’t add up.The magnitude of these errors are enormous - like for this company whose reserves in the balance sheet show a whopping Rs 2.16 billion discrepancy.

This shocking revelation came as the result of an exercise at IRIS to develop India’s first XBRL database of listed companies. The exercise included a study of the financials of the past 5 years of more than 1,400 listed Indian companies. The study, which is being carried out in phases, has so far covered only companies in manufacturing and services. Banks and financial services companies will be covered in the next round. The project used the taxonomy approved by the Institute of Chartered Accountants of India.

According to the findings, of the 209 companies identified with discrepancies,

60% of the companies are listed on both the NSE and BSE, 1% on the NSE alone and the rest on the BSE alone.
In terms of sectoral dispersion, textiles with 27 companies accounted for the most, followed by IT (18), Steel (10) and Pharmaceuticals (9).
In terms of geographical dispersion, Maharashtra with 60 companies accounted for the most, followed by Delhi at a distant second with 29 companies. Tamil Nadu (22), Andhra (22) and Gujarat (19) followed.
109 companies had errors in the balance sheet, 66 in their cash flow statements while 34 had errors creeping into their Profit & Loss Statements.
XBRL, or eXtensible Business Reporting Language, is often described as the barcode of information and has been acknowledged as the harbinger of transparency in financial reporting worldwide. More than 100 countries have adopted XBRL, this includes India. RBI, SEBI and the two stock exchanges (BSE and NSE) are championing the adoption of XBRL in India, with the ICAI providing leadership. As a first step towards full fledged adoption of XBRL in India, the Institute of Chartered Accountants of India has recently approved the taxonomy for manufacturing and services companies.

All Indian companies with ADRs outstanding have to file with the Securities Exchange Commission of the USA in XBRL starting next year. In fact, Infosys has been part of the voluntary compliance program of the SEC for the last 3 years and Mohandas Pai is a recent addition to the board of XBRL International.

On discovering any kind of misreporting, all eyes generally turn to the auditors, especially after the Satyam fiasco. But I feel it would be unfair to simply blame the auditors, as it is also the responsibility of company managements to get it right. In fact, we wish to compliment the Institute of Chartered Accountants for introducing XBRL in India that alone would have thrown up every one of these cases of misreporting which the auditors could have then caught and corrected.

I would say that both the companies and auditors should have paid more attention. But while I agree that there could be the odd case where some companies may have fudged their accounts deliberately, I would not pin the fraud label on all of them. In fact, we are contacting each company individually to point out the problems to them which they may rectify if they so desire.

It does not matter whether the quantum of discrepancies are material. The very fact that there are discrepancies is a serious enough matter warranting further examination to prevent such occurrences in the future. IRIS will pass on the findings of the study to the Ministry of Corporate Affairs, SEBI, and the stock exchanges.

I must state unequivocally that the purpose of introduction of XBRL is not to catch errant companies. In fact, with XBRL, companies will not make errors in their reporting if they are able to implement XBRL within the organization effectively.

S. Swaminathan is the Founder CEO of IRIS, and India’s leading XBRL evangelist.

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