Friday, December 29, 2023

Can a Chartered Accountant Certify Future Financial Information?


Prospective Financial Information (PFI) involves making educated predictions about a company's future finances. This article delves into whether a Chartered Accountant (CA) can certify PFI and explains the process in simple terms.

1. Mandate by ICAI: ICAI allows CAs, as per Clause 3 of Part 1 of the Second Schedule to the Chartered Accountants Act, 1949, to give assurance on PFI. This means a CA can review and validate certain future financial predictions.

2. Guiding Principles for Assignment: CAs can evaluate PFIs, including forecasts or projections. The report must mention where the information comes from, the basis of forecasts, and major assumptions. However, the CA doesn't guarantee the accuracy of the information.

3. Forecast vs. Projection: Understanding the difference between a forecast and a projection:

DefinitionBased on best estimatesBased on hypothetical assumptions
AssumptionsBest-estimatedHypothetical or a mix
ScenarioPossible scenarios based"What-if" scenarios with no
on expected eventscertainty of future events

4. Why Do We Need Auditor's Assurance on PFI? Having a CA review PFIs adds reliability, making the predictions more trustworthy for stakeholders. This is crucial when dealing with future financial scenarios.

5. Level of Assurance by a CA in PFI: CAs provide a moderate level of assurance since predicting the future involves some guesswork. They review the evidence supporting assumptions but don't guarantee absolute accuracy.

6. Period Covered: The CA considers how long the predictions stretch. Longer periods mean more uncertainty, so shorter periods are often more realistic and reliable.

7. Presentation and Disclosures in PFI: The CA checks if the presentation is clear and not misleading. They ensure that assumptions, accounting policies, and the date of preparation are transparently disclosed.

8. Acceptance of Engagement: Before accepting the job, the CA looks at how the predictions will be used, the period covered, and if the assumptions are reasonable. If things seem unrealistic, they may decline the engagement.

9. Examination Procedures: Auditors ensure compliance with standards, understand the business, and assess the reasonableness of assumptions. They verify that hypothetical assumptions make sense.

10. Need for Robust Documentation: Since predicting the future is tricky, CAs keep thorough records. This documentation is vital if the predictions turn out differently, serving as a reference for the work done.

11. Reporting Requirement by Auditor: Reports follow a specific format (SAE 3400) and include negative assurance, basis of preparation, and relevant caveats. This ensures a clear and standardized communication.

12. UDIN Generation: A Unique Document Identification Number (UDIN) is a must for certifications and audits performed by full-time Practicing Chartered Accountants, ensuring authenticity and accountability.

Conclusion: Predicting the financial future involves some uncertainty. CAs follow guidelines (SAE 3400) to provide a moderate level of assurance. However, it's essential to understand that predicting the future, even with a CA's help, involves some level of uncertainty