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A. Krishnan

On the one hand, there are CAs with the accredited role of looking into irregularities while, on the other, there are bands of similarly skilled CAs on the rolls of companies under audit to help the promoters conceal the irregularities. The skills are used for cross-purposes.

NOTWITHSTANDING its importance, one hears of corporate governance mostly when things go wrong. In the US, following the recent corporate and accounting frauds, major steps through the legal enactment process are being taken up for improving corporate governance.

In India, some are of the view that nominee directors of financial institutions are responsible for the sickness of corporate entities. There is a board of directors, which is the final authority for a corporate body.

Besides the promoters who run the company, the board comprises other persons as well. The board takes the credit when the company runs well and, likewise, it should — the entire board, that is — must take the blame when things go wrong.

There are directors who are chosen by those run the show to merely act as rubber stamps. Currently, the law on this front is vague, and does not prevent such a practice. Loopholes in law are bound to be taken advantage of by businessmen with vested interests.

It is here the importance of law needs to be stressed upon. There must be some criteria in place for directorship.

A director should contribute positively to the running of a company. There must be a mechanism to measure his contribution. If found inefficient, he should not be allowed to continue.

One need not wait for an annual general meeting to enforce this. In the event though, the issue of an `inconvenient' director being given the quit notice first could arise. The law should not allow the promoter to have the final word in this regard.

In this age of electronics, a company should go beyond recording the resolutions and the brief minutes leading to them. Deliberations on matters of importance should be recorded electronically and made available, as proof of directors' contribution. Dissent must be recorded truthfully, rather than resented and ignored.

The directors should not be asked to confine their attention only to those matters which the promoter includes in the agenda. They should be given powers to demand any information/data and include, in the agenda, what they consider as vital for the interests of the company.

Confined to the air-conditioned chambers of the boardroom, the directors seldom pay a visit to the actual place of activity. There are directors who even skip board meetings or sign in resolutions by circulation. Absence from board meetings must have the deterrence of cessation of directorship. Directors must also be allowed to interact with the operating staff to know first hand about what is happening. If the approach is positive, there need be no fear that such a step would interfere with the day-to-day functioning of the business. Complete freedom to promoters, it has been seen, results in failures. What about freedom with certain constraints?

The board should be proactive, not merely one that endorses what the promoter chooses to bring before it. For the directors to take a dynamic role, they should be paid attractive remuneration against the mere sitting fees at present. This remuneration should be a statutory requirement, not dependent on the discretion of the promoter.

Only legitimate monetary benefits would induce directors to play a constructive and beneficial role in the running of the company. And the promoters should also be amply rewarded with handsome salaries and other benefits so that they do not resort to questionable practices, which make them rich but render the company sick. Also, no one should be on the board of more than one company.

Whether they be nominees or not, the responsibility for running the company will be on more than one director. And the media and the public will have greater opportunity to know what is happening.

Coming to auditors, there is no guarantee that the dubious role that they have played in the US is not happening in our country as well. This is like the fence eating the crop. An audit firm should not be the one to hunt with the hunter and run with the hound.

Auditors, with their knowledge of accounting and related matters, are deemed as experts and specialists. Their accounting skills should be used to uncover, not masquerade, the evil doings.

On the one hand, there are CAs with the accredited role to look into irregularities while, on the other, there are bands of similarly skilled CAs on the rolls of companies under audit to help the promoters conceal the irregularities. The skills are used for cross-purposes.

Strangely, there are audit firms which are brought around to ignore the irregularities or allow them to be rectified (perhaps continuing in the meantime until the next audit) without being highlighted in the right forum.

If such cover-up operations go on, the audit firm would remain at the mercy of the audited firm — the fee being the carrot, and the threat of non-renewal of the audit work, the stick. The following are necessary for audit firms to stand their ground:

There must be a panel of firms registered with a legal body;

That legal body should send a list of audit firms in the panel for the firm to be audited, for selection of one through ballot by the board;

The audit fee should be fixed by the legal body, on a scale based on relevant criteria;

An audit firm should not audit more than one company in the same group;

The same firm should not audit the same company in two consecutive years;

If the auditing firm comes across irregularities of a serious nature, it should send its report directly to the legal body; and

Serious failures on the part of the audit firm should be met with deterrent punishment.

It will be worthwhile to prescribe two different channels for prospective CAs: One, for those who seek employment in the accounts wing of companies, and the other, for those who prefer a career as auditor.

The curriculum for auditors should be more rigorous — that is, not only for acquiring the necessary auditing skills but also getting a grasp of the usual subjects which those in the other channel will learn. Only this segment should be chosen for employment in audit firms.

Every company must have on record a manual for its accounting and other major functions — such as sale, purchases, and so on. The board must approve this manual within a year of commencement of business.

The auditing firm must comment on the adequacy of the manual and whether it is being strictly adhered to for carrying on operations in a transparent and clean manner.

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