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Panel prescribes dope test for companies

Mumbai, March 21: Empowered auditors and numbers that bare it all — these are the top two cures N. R. Narayana Murthy prescribes for cleaner boardrooms.

The Infosys mentor heading a committee on corporate governance constituted by the Securities and Exchange Board of India (Sebi) today released a report that asks companies to strengthen audit committees and improve the quality of financial disclosures. These should include the entire gamut of transactions a firm is involved in, as well as the way funds in which garnered through maiden flotations are invested.

The committee has attached high significance to the position of nominee directors and better disclosures on compensation paid to non-executive directors.

It has suggested that audit committees of publicly listed companies should review financial statements including quarterly/half yearly financial information, record of related party transactions. All members of the committee should be “financially literate” and, at least, one member should specialise in have accounting.

In case a company follows a procedure different from the prescribed accounting standard, the management should justify why it believes the departure from the norm will present a more representative picture of the underlying business transaction.

A statement of all transactions, and those involved, should be placed before the independent audit committee for formal approval. If a transaction is not executed at an “arm’s length basis”, the management should be able to convince the audit committee about it.

In an effort to cope with business exigencies better, the panel has proposed that management place a report before the entire board of directors every quarter, documenting the business risks faced by the company.

The rampant misuse of IPO funds seen in the 1980’s and 19990’s by many companies that diverted resources to other group activities has attracted special attention. The committee said companies raising money through a maiden flotation should tell the audit committee how money raised from the public has been used.

It has also specified that a code of conduct should be laid down for board members and senior management. The committee is of the opinion that there is no need for nominee directors any more. Where a financial institution wishes to name a director on the board, such an appointment should be made by the shareholders. An institutional director appointed this way will have the same responsibilities, and shall be subject to the same liabilities as any other director.

Companies should provide protection to “whistle blowers” from unfair termination and other unfair treatment.

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