OPEN FORUM
New Delhi, 12 February 2009
Corporate Governance
REVIEW AUDIT, ACCOUNTABILITY NEEDED
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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