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Corporate Governance:REVIEW AUDIT, ACCOUNTABILITY NEEDED, by Dhurjati Mukherjee,12 February 2009 Print E-mail


New Delhi, 12 February 2009

Corporate Governance


By Dhurjati Mukherjee

The unraveling of the Satyam scam, India’s fourth largest IT company, has put a big question mark on not only the role of corporate entities but also the urgent need for re-examining the issue of corporate governance and the role of the company auditors. Clearly, with competitiveness and the need for rapid growth becoming crucial better corporate governance has become imperative. Plainly, at Satyam the governance framework has not been effectively implemented and nor have the auditors been judicious in examining the company accounts.

Another reason why corporate governance has assumed importance in recent times is the entry of private capital as the primary source of funds for investment. Also, the increasing advances in information and communications technology necessitate better performance and higher productivity for which corporate standards have to be highly professionalized. Thus, as the former President of the World Bank James Wolfensohn, observed, corporate governance has to promote “corporate fairness, transparency and accountability” and such governance is crucial to world economy. 

In fact, Cadbury Chief Sir Adrian Cadbury captured the spirit of corporate governance by stating: “Corporate governance is holding the balance between economic and social goals and between individual and communal goals. The governance structure is there for the efficient use of resources and equally to require accountability for the stewardship of these resources”. In India several committees have reported on the subject, including those headed by Kumaramangalam Birla, Narayanan Murthy, Naresh Chandra and J. J. Irani.

But scams of various dimensions reflecting corporate corruption have surfaced every now and again. Take the case of Nagarjuna Finance where its head was eventually arrested but that did not mean that the over 85,000 depositors would recover their savings of Rs 100 crores. At Duncan Industries too, the depositors are running from pillar to post trying to make sense of the repayment scheme which is intended to fool them and inordinately defer payment.

Undoubtedly, the all-round decline in standards in the corporate world and the nexus between businessmen and politicians has vitiated the atmosphere. It is generally believed that this nexus solidified further since the mid-90s when economic liberalization opened up opportunities and funds started flowing. Matters became worse when the decision-making process shifted to the States. 

In Satyam’s case, it is obvious that Raju bribed many politicians ---- not just two Andhra Pradesh Chief Ministers but many national leaders who helped him in his unethical dealings. Importantly, the role of independent directors in allowing such a thing to happen raises many questions about their sincerity and responsibility.

One argument being advanced is that these directors did not have the time to get a grip of the details of the Company’s operations, its business strategy, organizational complexities and the financial numbers. The fact is that a management bent on fraud would have little difficulty in hoodwinking its directors.     

Add to this the role of leading audit firm Price Waterhouse Coopers which obviously manipulated the accounts at the behest of the Company and did not care to scrutinize the accounts in a professional manner. The intriguing fact is that the audit fee increased from Rs 92 lakhs in 2004-05 to Rs 1.69 crores in 2005-06 after which there was a phenomenal jump to Rs 4.21 crores the following year. Interestingly, the hike in auditing fee hasn’t been as significant in other IT majors such as Wipro and Infosys.

It may be mentioned here that this audit firm was also involved in the auditing of the Global Trust Bank (GTB) which also collapsed like Satyam a few years ago. Pointed out the former Union Revenue Secretary, E. A. S. Sarma in a letter to SEBI recently: “The regulators allowed the promoters of GTB to get off the hook and siphon off funds and permitted Price Waterhouse to continue to make merry on the Indian turf.” Adding, “this was allowed because the firm employed the kith and kin of important Government figures.”

Delving into the actions taken by the Government to ensure proper corporate governance over the years, the Department of Company Affairs introduced measures like the Audit Committee, Directors’ Responsibility Statement. In 2003 it set up the Serious Frauds Investigation Office and undertook the E-governance project, MCA 21. The SEBI brought Clause 49 of the Listing Agreement which stipulated a minimum number of independent directors on the Board and the Audit Committee, certification of accounts by the CEO/CFO and disclosures in respect of party transactions, accounting treatment and directors’ fees.

The Companies Act, which prescribes the powers and duties of the auditor, is considered the watchdog with a lot of stipulations imposed on him. The Act has also devolved a lot of responsibilities on the Audit Committee which is virtually the last word in financial matters and ordinarily its recommendations are binding on the Board.

Meanwhile, in view of the Satyam scam, SEBI has been seriously considering the idea to float a public body to carry out the review audit of listed companies and guidelines in this regard are expected shortly. According to SEBI sources the investor protection funds would be used to carry out this review audit. The review audit could also be funded by the companies themselves but the independent body would empanel auditors with a good track record for carrying out such audit.

According to a report prepared by the Pune-based Indiaforensic Consultancy Services (ICS) at least 1200 companies listed on the domestic stock exchanges have forged their financial results in recent times. The ICS study has alleged that such improper accounting includes deferring revenue and inflating expenses. The figure includes 20-25 firms whose stocks make the benchmark Sensex. Obviously keeping this in view, the Government has decided to inspect the books of as many as 150 companies under section 209A of the Companies Act to review whether the accounts are in order.

In the US, there is a system of review audit by independent auditors. Basically the parameters are very important. Market sources point out that with recession tightening its grip on the global economy and stock exchanges in a state of flux, more and more Indian companies are tinkering with their financial statements to meet market expectations and keep their prices high. While there is talk of new laws and investigating agencies, honest intentions matter far more. Moreover, the country has enough institutional controls which, if enforced effectively, can prevent scams.  

Finally, it needs to be pointed out that corporate governance in the 21st century has become the most significant aspect of concern for rapidly developing countries like India, who are on the path of leaping ahead in the coming years. Corporate governance, corporate performance and social responsibility have to be highly professionalized and this new model can only bring about the needed transformation in the economic scenario.

New technologies that have created economic, trade and social opportunities have to be explored and implemented so as to increase productivity and create value, not only for industrial growth but for prosperity of society as a whole. But above all, adherence to ethics and values and transparency in operations are very necessary. ---- INFA

(Copyright, India News & Feature Alliance)






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