I swear that to the best of my knowledge, (which is pretty poor and may be revised in future) my company’s accounts are (more or less) accurate. I have checked this with my auditor’s and directors who (I pay to) agree with me....”
A cartoon on the cover of The Economist (August 17, 2002) spoofing a recent oath signed by the CEOs in the US certifying the accuracy of their financial statements.
After the rash of accounting scams in America — over the weekend there were indications that it could snowball to engulf Citigroup and AOL — and the financial shenanigans that rocked India Inc, the Centre is looking to tighten corporate governance norms to prevent an outbreak of financial skulduggery.
“A comprehensive review of the law and a thorough review of accounting and auditing standards is required,” says V. N. Kaul, Comptroller and Auditor General. An incremental approach to accounting standards and cosmetic tinkering with the Companies Act will have little impact, he says.
The government is mulling several measures that include the establishment of an Accounting Oversight Board to oversee audit of public companies that are subject to securities law, securing complete independence of audit committees and ensuring independence for auditors. Kaul says there is a need to ensure the independence of directors.
“Strengthening of internal audit and putting in a system for fair value accounting for stock options need attention within the Indian context,” said Kaul. However, Kaul is not in favour of diluting the concept of self-regulation and establishing a new regulatory mechanism. “It may be more appropriate to strengthen existing regulatory mechanisms such as Sebi rather than set up rival bureaucracies,” said Kaul.
Sebi executive director Dharmishta N. Raval feels the principles of corporate governance should not be made mandatory and ought to remain voluntary in nature. “If a company does not comply with corporate governance norms, the market will itself discipline it,” says Raval. “Sebi has been instrumental in pushing rating agencies like Icra and Crisil to develop corporate governance rating models.”
On its part, the Department of Company Affairs (DCA) has set up a high level committee under Naresh Chandra to look into various aspects of compliance of accounting and disclosure rules by companies. The committee has been requested to look into the issues concerning the relationship between companies and auditors and role of independent directors. “The DCA is working with the Institute of Chartered Accountants Of India to strengthen the functioning of audit committees of companies,” DCA secretary Vinod Dhall says. Dhall maintains that several provisions in the Companies Act are archaic and may be shed, if need be. The penalties in the Companies Act are so nominal that they fail to be effective deterrents, he said. However, Dhall says government intervention in business decisions should be minimal, and that there should be greater reliance on shareholder democracy.
Minister of state for law and justice Ravi Shankar Prasad feels transparency is a prime component of corporate governance. Kaul also feels fiduciary failures by board of directors, extensive undisclosed off-the-book activity without adequate public disclosures and excessive compensation to key executives are some of the prime problems that beset India Inc.
PTI adds: DCA is framing guidelines for getting the process of mergers and amalgamations in the corporate sector under its purview after the proposed National Company Law Tribunal is in place.