sox,naresh

8/13/2019 SOX,Naresh

1/27

Naresh Chandra reports: A pale shadow of SOX

Amit C. Kamath

IN THE last few months most business newspapers and magazines have beenoccupied with the reports of the Naresh Chandra Committee Report, also called

the Committee on Corporate audit and Governance !hile ac"nowledging theefforts of the Committee and its implications in the area of corporategovernance, financial reporting standards, compan# law, auditing, andbusiness ethics, a million dollar $uestion is% &'re these recommendations goodenough(&

This $uestion is highl# relevant for if the media the business fraternit# andprofessional bodies appear to be showering praise on the Committee)srecommendations, the average ta*pa#er merel# e*pects to see an end to thesaga of corporate scams being unearthed month after month +assivedebacles in recent times involve a whole host of well "nown companiesincluding the +ardia Group, -l#ods, +odern, .athe/a Group, .arasrampuriaGroup, Core Healthcare, Ra/inder Group 0 all names that appear in theReserve 1an" of India)s Rs 223,333 crore list of defaulters The 4epartment ofCompan# 'ffairs !eb site, www.dca.nic.in, lists a set of companies, that hadvanished after issuing shares to the general public for Rs 2256 76 crore 8as on9ul# :7, :336;

!hile the small fish have $uietl# disappeared, the larger ones are fightinglength# court battles with ban"s, financial institutions and creditors to preventseizure of assets, which has been made possible b# the


2/27

standards This tas" needed to be underta"en with utmost care, as there wasno standard formula, which would appl# to one and all Each econom# wasre$uired to review its law and financial s#stem to identif# the loopholes @ncethis was complete, a new set of rules was devised b# amending the provisionsof the compan# law, accounting and auditing standards and so on

!ith the


3/27

some interesting findings despite being restricted in their scope of wor" whichis &to e*amine if the present s#stem of regulation of the profession ofChartered 'ccountants, Compan# nless an alternativesolution is shortl# found, the corporate world will /ust operate as it used tofrom the good old past b# either fighting investors in court or better still b#simpl# vanishing

8The author is a New Dealand based academic and freelance writer He can becontacted at amit"amath nzF#ahoo co nz;

Executive Summary

The initial stimulus for corporate governance reforms came after the South-Eastand East Asian crisis of 1997-98. Governments multilateral institutions !an"s and

#


4/27

companies recalled that the devil la$ in the details % the nitt$-gritt$ of transactionsamong companies !an"s financial institutions and capital mar"ets& corporate la's

!an"ruptc$ procedures and practices& the structure of o'nership and cron$ capitalism&stoc" mar"et practices& poor !oards of directors 'ith scant fiduciar$ responsi!ilit$& poordisclosures and transparenc$& and inade(uate accounting and auditing standards.

2. )ndia has not !een in the middle of this glo!al and Asian reform movement as areaction to corporate and financial crises. *irst unli"e South-East and East Asia thismovement did not start !ecause of a national or region-'ide macroeconomic andfinancial collapse. )ndeed the Asian crisis !arel$ touched )ndia. Secondl$ unli"e otherAsian countries the initial drive for !etter corporate governance and disclosure perhapsas a result of the 1992 stoc" mar"et +scam, and the onset of international competitionconse(uent on the li!eralisation of econom$ that !egan in 199 came from all-)ndia

industr$ and !usiness associations and in the epartment of /ompan$ Affairs. Thirdl$from April 2 1 listed companies in )ndia need to follo' ver$ stringent guidelines oncorporate governance 'hich ran" among some of the !est in the 'orld. Sadl$ there is a'ide gap !et'een prescription and practice. 0orse adverse legal conse(uences for thedefaulters almost al'a$s get caught in the 'e! of inefficienc$ corruption and theintricate dilator$ legal s$stem. Thus 'hile corporate governance reforms in )ndia faroutstrips that of man$ other countries the performance in either lags ver$ much !ehind.

#. After the Enron de!acle of 2 1 came other scandals involving large S

companies such as 0orld/om 'est Glo!al /rossing and the auditing lacunae thateventuall$ led to the collapse of Andersen. These scandals triggered another phase ofreforms in corporate governance accounting practices and disclosures % this time morecomprehensive than ever !efore. )n 3ul$ 2 2 less than a $ear from the date 'hen Enronfiled for !an"ruptc$ the Sar!anes-45le$ 6ill popularl$ called S4 'as enacted. TheAct !rought 'ith it fundamental changes in virtuall$ ever$ area of corporate governance

% and particularl$ in auditor independence conflicts of interest corporate responsi!ilit$enhanced financial disclosures and severe penalties !oth fines and imprisonment for'ilful default !$ managers and auditors. )t is fair to predict that the S4 Act 'ill do

more to change the contours of !oard structure auditing financial reporting andcorporate disclosure than an$ other previous la' in S histor$.

:. 4n 21 August 2 2 the epartment of /ompan$ Affairs /A under the;inistr$ of *inance and /ompan$ Affairs appointed this


5/27

e5amine various corporate governance issues. Among others this /ommittee has !eenentrusted to anal$se and recommend changes if necessar$ in diverse areas such as>

the statutor$ auditor-compan$ relationship so as to further strengthen the professional nature of this interface&

the need if an$ for rotation of statutor$ audit firms or partners& the procedure for appointment of auditors and determination of audit fees& restrictions if necessar$ on non-audit fees& independence of auditing functions& measures re(uired to ensure that the management and companies actuall$ present

+true and fair, statement of the financial affairs of companies& the need to consider measures such as certification of accounts and financial

statements !$ the management and directors& the necessit$ of having a transparent s$stem of random scrutin$ of audited accounts& ade(uac$ of regulation of chartered accountants compan$ secretaries and other

similar statutor$ oversight functionaries& advantages if an$ of setting up an independent regulator similar to the ?u!lic

/ompan$ Accounting 4versight 6oard in the S4 Act and if so its constitution& and the role of independent directors and ho' their independence and effectiveness can

!e ensured.

@. As is evident the terms of reference to this /ommittee Appendi5 1 lie at theheart of corporate governance. Given !elo' are the recommendations of the /ommittee.

Recommendations in Chapter 2: The Auditor Company Relationship

. The /ommittee !elieves that the propriet$ of auditors rendering non-auditservices is a comple5 area 'hich needs to !e carefull$ dealt 'ith "eeping in vie' thet'in o!Bectives of maintaining auditor,s independence and ensuring that clients get the

!enefit of efficient high (ualit$ services.

7.


6/27

8. An auditor 'ho depends upon a single audit client for a siCea!le portion of annualrevenues ris"s compromising his independence. The /ommittee therefore concludedthat certain recommendations in this regard 'ere also in order.

Recommendation 2.1: Disqualifications for audit assi nments

In line with international best practices, the Committee recommends an abbreviated list ofdisqualifications for auditing assignments, which includes: Prohibition of any direct financial interest in the audit client by the audit firm, its partners

or members of the engagement team as well as their direct relatives. This prohibition wouldalso apply if any relative of the partners of the audit firm or member of the engagement teamhas an interest of more than per cent of the share of profit or equity capital of the audit client.

Prohibition of receiving any loans and/or guarantees from or on behalf of the audit clientby the audit firm, its partners or any member of the engagement team and their directrelatives.

Prohibition of any business relationship with the audit client by the auditing firm, itspartners or any member of the engagement team and their direct relatives.

Prohibition of personal relationships , which would e!clude any partner of the audit firm ormember of the engagement team being a relative of any of "ey officers of the client company,i.e. any whole#time director, C$%, C&%, Company 'ecretary, senior manager belonging to thetop two managerial levels of the company, and the officer who is in default (as defined bysection ) of the Companies *ct+. In case of any doubt, it would be the tas" of the *uditCommittee of the concerned company to determine whether the individual concerned is a "eyofficer.

Prohibition of service or cooling off period , under which any partner or member of the

engagement team of an audit firm who wants to oin an audit client, or any "ey officer of theclient company wanting to oin the audit firm, would only be allowed to do so after two yearsfrom the time they were involved in the preparation of accounts and audit of that client.

Prohibition of undue dependence on an audit client . 'o that no audit firm is undulydependent on an audit client, the fees received from any one client and its subsidiaries andaffiliates, all together, should not e!ceed ) per cent of the total revenues of the audit firm.-owever, to help newer and smaller audit firms, this requirement will not be applicable to auditfirms for the first five years from the date of commencement of their activities, and for those whose total revenues are less than s./) la"hs per year.

This recommendation has to be read with ecommendation .0 below.

Note: A direct relative is defined as the individual concerned, his or her spouse, dependent parents, children or dependent siblings. For the present, the term relative is as defined underSchedule IA of the Companies Act. o!ever, the Committee believes that the Schedule IAdefinition is too !ide, and needs to be rationalised for effective compliance.


7/27

9. Section 2 1 of the S4 Act has disallo'ed eight t$pes of non-audit services 'iththe provision to disallo' more as ma$ !e determined !$ the ne'l$ legislated ?u!lic/ompan$ Accounting 4versight 6oard. ;ost of these restrictions e5ist in )ndia. *ore5ample the )/A) prohi!its its mem!ers as auditing firms from offering services such as

!oo""eeping maintaining accounts internal audit designing an$ information s$stem'hich is a su!Bect of audit or internal audit !ro"ering investment advisor$ andinvestment !an"ing services. Even so the /ommittee !elieves that it is necessar$ to

provide an e5plicit list of prohi!ited non-audit services

Recommendation 2.2: !ist of prohi"ited non#audit ser$ices

The Committee recommends that the following services shouldnot be provided by an audit firm toany audit client: *ccounting and boo""eeping services, related to the accounting records or financial

statements of the audit client. Internal audit services. &inancial information systems design and implementation, including services related to IT

systems for preparing financial or management accounts and information flows of a company. *ctuarial services. 1ro"er, dealer, investment adviser or investment ban"ing services. %utsourced financial services. 2anagement functions, including the provision of temporary staff to audit clients. *ny form of staff recruitment, and particularly hiring of senior management staff for the audit

client. 3aluation services and fairness opinion.Further in case the firm underta"es an# service other than audit, or the prohibited services listedabove, it should be done onl# !ith the approval of the audit committee.

1 . The /ommittee has no (ualms per se a!out audit firms having su!sidiaries orassociate companies engaged in consulting or other specialised !usiness services. )tma"es a great deal of sense for good auditors to 'iden their horiCons !$ occasionall$engaging in !usiness consulting Bust as it does for !usiness consultants to occasionall$

get involved in the nitt$-gritt$ of auditing.


8/27

Recommendation 2.%: &ndependence Standards for Consultin and Other'ntities that are Affiliated to Audit (irms

Prohibition of undue dependence . 4here an audit firm has subsidiary, associate or affiliated

entities, yardstic" of no more than ) per cent of revenues coming from a single audit clientstated in ecommendation ./ should be widened to accommodate the consolidated entity.Thus, no more than ) per cent of the revenues of the consolidated entity should come from asingle corporate client with whom there is also an audit engagement.

The other prohibitions listed in ecommendation ./ should also apply in full to all affiliatedconsulting and specialised service entities of any audit firm that are either subsidiaries of theaudit firm, or have common ownership of over )5 per cent with the audit firm. *nd all the testsof independence outlined in ecommendation ./ should be carried over to the consolidatedentity.

Therefore, this recommendation has to be read with ecommendation ./.

Consolidation tests should test full#, line$b#$line, for all subsidiaries, !hether the audit firm, or its partners, o!n over %& per cent of e'uit#, or share of profit.

11. The /ommittee deli!erated at length the issue of rotation of auditors. )t heard thevie's of t'o distinct schools of thought> the minorit$ 'hich !elieved in the compulsor$rotation of audit firms a nota!le proponent !eing the office of /AG & and the maBorit$'hich 'as against it. Given international practice and the fact that there is no conclusive

proof of the gains 'hile there is sufficient evidence of the ris"s the Committee decidednot to recommend any statutory rotation of audit firms . However, in line with the SOX

Act, the Committee is in favour of compulsory rotation of audit partners .

Recommendation 2.): Compulsor* Audit +artner Rotation There is no need to legislate in favour of compulsory rotation of audit firms. -owever, the partners and at least )5 per cent of the engagement team (e!cluding article

cler"s and trainees+ responsible for the audit of either a listed company, or companies whosepaid#up capital and free reserves e!ceeds s./5 crore, or companies whose turnover e!ceedss.)5 crore, should be rotated every five years.

*lso, in line with the provisions of the $uropean 6nion and the I&*C, persons who arecompulsorily rotated could, if need be, allowed to return after a brea" of three years.

12. )n ensuring rectitude nothing 'or"s li"e disclosures. The guidance D0hen indou!t disclose is pro!a!l$ the simplest and !est $ardstic" for evaluating good corporategovernance.


9/27

Recommendation 2.,: Auditor-s disclosure of contin ent lia"ilities

It is important for investors and shareholders to get a clear idea of a companys contingentliabilities because these may be significant ris" factors that could adversely affect the corporationsfuture health. The Committee recommends that management should provide a clear description inplain $nglish of each material liability and its ris"s, which should be followed by the auditors clearly worded comments on the managements view. This section should be highlighted in the significantaccounting policies and notes on accounts, as well as, in the auditors report, where necessary.

1#. A (ualification can !e a serious indictment of the financial affairs andmanagement of a compan$. Fet far too fe' shareholders reall$ understand 'hat a(ualification means and companies are hardl$ ever (uestioned !$ regulators such as the

SE6) and the /A regarding such (ualifications. The /ommittee !elieves that this mustchange % and the onl$ 'a$ of doing so is !$ mandating disclosures to a greater degree.

Recommendation 2. : Auditor-s disclosure of qualifications andconsequent action

7ualifications to accounts, if any, must form a distinct, and adequately highlighted, section ofthe auditors report to the shareholders.

These must be listed in full in plain $nglish 8 what they are(including quantification thereof+,

why these were arrived at, including qualification thereof, etc. In case of a qualified auditors report, the audit firm may read out the qualifications, with

e!planations, to shareholders in the companys annual general meeting. It should also be mandatory for the audit firm to separately send a copy of the qualified report

to the %C, the '$1I and the principal stoc" e!change (for listed companies+, about thequalifications, with a copy of this letter being sent to the management of the company. Thismay require suitable amendments to the Companies *ct, and corresponding changes in TheChartered *ccountants *ct.

1:. The /ompanies Act ma"es it more difficult to replace an auditor than to reappointone. 0hile this is as it should !e the /ommittee felt that corporate governance 'ould

!enefit from disclosing the reasons for replacement. The /ommittee felt that if themanagement 'ere to !e more accounta!le to the shareholders and the audit committee inthe matter of replacing auditors this is li"el$ to ma"e the auditors more fearless.

9


10/27

Recommendation 2./: 0ana ement-s certification in the e$ent of auditor-sreplacement 'ection ) of the Companies *ct needs to be amended to require a special resolution of

shareholders, in case an auditor, while being eligible to re#appointment, is sought to bereplaced. The e!planatory statement accompanying such a special resolution must disclose the

managements reasons for such a replacement, on which the outgoing auditor shall have theright to comment. The *udit Committee will have to verify that this e!planatory statement istrue and fair

1@. The /ommittee felt that it 'ill !e good practice for the audit firm to annuall$ filea certificate of independence to the Audit /ommittee and or the !oard of directors of theclient compan$. This 'ill help in ensuring that the auditors have retained theirindependence throughout their period of engagement.

Recommendation 2. : Auditor-s annual certification of independence

1efore agreeing to be appointed (along with 9(/+(b++, the audit firm must submit a certificateof independence to the *udit Committee or to the board of directors of the client companycertifying that the firm, together with its consulting and specialised services affiliates,subsidiaries and associated companies:

/. are independent and have arms length relationship with the client company

. have not engaged in any non#audit services listed and prohibited in ecommendation .above and

0. are not disqualified from audit assignments by virtue of breaching any of the limits, restrictionsand prohibitions listed in ecommendations ./ and .0.

In the event of an# inadvertent violations relating to (ecommendations ).*, ).) and ).+, the auditfirm !ill immediatel# bring these to the notice of the Audit Committee or the board of directors ofthe client compan#, !hich is e pected to ta"e prompt action to address the cause so as to restoreindependence at the earliest, and minimise an# potential ris" that might have been caused.

1 . The /ommittee felt that audit committees should !e allo'ed to !e true to theirname !$ ensuring that the$ have a larger role 'ith regard to audit. )n fact this should !ethe starting point in empo'ering audit committees. Therefore it recommends

Recommendation 2. : Appointment of auditors

1


11/27

The *udit Committee of the board of directors shall be the first point of reference regarding theappointment of auditors. To discharge this fiduciary responsibility, the *udit Committee shall: discuss the annual wor" programme with the auditor review the independence of the audit firm in line with ecommendations ./, . and .0

above and recommend to the board, with reasons, either the appointment;re#appointment or removal of

the e!ternal auditor, along with the annual audit remuneration.- ceptions to this rule ma# cover government companies !hich follo! section /*0 of theCompanies Act1 and scheduled commercial ban"s !here the (2I has a role to pla#1.

17. Section # 2 of the S4 Act specifies that the /E4 and /*4 of all listedcompanies must certif$ to the SE/ regarding the veracit$ of each annual and (uarterl$financial report. The /ommittee e5amined the management certification issue in detail

and concluded that it constitutes a good corporate governance practice.


12/27

They, the signing officers, have also disclosed to the auditors as well as the *udit Committeeinstances of significant fraud, if any, that involves management or employees having asignificant role in the companys internal control systems.

They, the signing officers, have indicated to the auditors, the *udit Committee and in the noteson accounts, whether or not there were significant changes in internal control and;or ofaccounting policies during the year under review.

In the event of any materially significant misstatements or omissions, the signing officers willreturn to the company that part of any bonus or incentive# or equity#based compensation which was inflated on account of such errors, as decided by the *udit Committee.

Recommendations from Chapter : Auditin! the Auditors

18. The /ommittee deli!erated long and hard on the issue of 'hether it 'as necessar$to esta!lish a ne' independent ?u!lic 4versight 6oard ?46 for supervising the 'or"of auditors % such as the one proposed in the S4 Act. 4n !alance the /ommittee feltthat there is no need at this point of time to set up $et another ne' regulator$ oversight

!od$.


13/27

Composition of "CS"#s $R%: * five#member board, including the chairman. The chairmanshall be nominated by the


14/27

the severity of misconduct, so that processes can be designed, and punishments awarded,according to the severity of the offence.

(rosecution )irectorate: *n independent permanent directorate within the structure of IC*Ishall be created, which shall act as the @rosecution


15/27

Institute would still be free to ta"e such cases to the Committee if it feels there is a need to doso.

9. *fter registering the information case, the procedure outlined for the complaint case may befollowedmutatis mutandis.

)isciplinary Committee

$nquiries in relation to misconduct of members shall be held by the


16/27

act upon the decisions of the overnment shall be accompanied by a fee s.),555, which will be returned as soon as the


17/27

22. At the core of corporate governance is the !oard of directors. A Boint-stoc"compan$ is o'ned !$ the shareholders 'ho appoint a !oard of directors to supervisemanagement and ensure that it does all that is necessar$ !$ legal and ethical means toe5pand the !usiness and ma5imise long-term corporate value.

2#. The first point to note is the one that is fre(uentl$ forgotten> the !oard isappointed !$ the shareholders and other "e$ sta"eholders. Simpl$ put directors are

fiduciaries of shareholders, not of the management . This does not impl$ that the !oardmust have an adversarial relationship 'ith the management.


18/27

E. -as not been a director, independent or otherwise, of the company for more than three termsof three years each (not e!ceeding nine years in any case+

*n employee, e!ecutive director or nominee of any ban", financial institution, corporations ortrustees of debenture and bond holders, who is normally called a nominee director will bee!cluded from the pool of directors in the determination of the number of independentdirectors. In other words, such a director will not feature either in the numerator or thedenominator.

2oreover, if an e!ecutive in, say, Company F becomes an non#e!ecutive director in anotherCompany G, while another e!ecutive of Company G becomes a non#e!ecutive director inCompany F, then neither will be treated as an independent director.

The Committee recommends that the above criteria be made applicable for all listedcompanies, as well as unlisted public limited companies with a paid#up share capital and free

reserves of s./5 crore and above or turnover of s.)5 crore and above with effect from thefinancial year beginning 550.

2@. The /ommittee felt that to !e reall$ effective independent directors need to have asu!stantial voice !$ !eing in a maBorit$. )t 'as felt that rather than the management orthe promoters the /ommittee should put its 'eight !ehind minorit$ shareholders andother sta"eholders such as consumer or creditors. The committee therefore recommendsthat independent directors have ade(uate presence and strength on the 6oard especiall$of the companies that are listed or !eing pu!lic companies a!ove a specific siCe.

Recommendation ).2: +ercenta e of independent directors?o less than )5 per cent of the board of directors of any listed company, as well as unlisted publiclimited companies with a paid#up share capital and free reserves of s./5 crore and above, orturnover of s.)5 crore and above, should consist of independent directors 8 independence beingdefined in ecommendation 9./ above.-owever, this will not apply to: (/+ unlisted public companies, which have no more than )5shareholders and which are without debt of any "ind from the public, ban"s, or financial institutions,as long as they do not change their character, ( + unlisted subsidiaries of listed companies.Nominee directors !ill be e cluded both from the numerator and the denominator.

2 . /orporate governance norms re(uire companies to have a num!er of committees.6oards of listed and large unlisted pu!lic limited companies also have greater fiduciar$responsi!ilities. *or these reasons the committee felt that the la' should prescri!e aminimum !oard siCe as 'ell.

Recommendation ).%: 0inimum "oard si6e of listed companies

18


19/27

The minimum board si=e of all listed companies, as well as unlisted public limited companies with apaid#up share capital and free reserves of s./5 crore and above, or turnover of s.)5 crore andabove should be seven 8 of which at least four should be independent directors.-owever, this will not apply to: (/+ unlisted public companies, which have no more than )5shareholders and which are without debt of any "ind from the public, ban"s, or financial institutions,as long as they do not change their character, ( + unlisted subsidiaries of listed companies.

27. The 6oards and their committees should not merel$ have meetings pro forma priorto a nice lunch. The shareholders have a right to "no' ho' much time the 6oard and itscommittees spent in discussing the shareholders, interest. The committee thereforerecommends that duration of 6oard committee meetings !e disclosed.

Recommendation ).): Disclosure on duration of "oard meetin s 7

Committee meetin sThe minutes of board meetings and *udit Committee meetings of all listed companies, as well asunlisted public limited companies with a paid#up share capital and free reserves of s./5 crore andabove or turnover of s.)5 crore must disclose the timing and duration of each such meeting, inaddition to the date and members in attendance.

28. The /ommittee feels that the (ualit$ of 6oard meetings is enhanced 'ith a fullerattendance. Since there are technological means availa!le to do so the /ommitteesuggests that increased presence of mem!ers of the 6oard !e encouraged through tele andvideo conferencing su!Bect to certain safeguards. This might also reduce cost of6oard /ommittee meetings to the compan$.

Recommendation ).,: 8ele#conferencin and $ideo conferencinIf a director cannot be physically present but wants to participate in the proceedings of the boardand its committees, then a minuted and signed proceedings of a tele#conference or videoconference should constitute proof of his or her participation. *ccordingly, this should be treated aspresence in the meeting(s+. -owever, minutes of all such meetings should be signed andconfirmed by the director;s who has;have attended the meeting through video conferencing.

29. The /ommittee noted that !oth the 1997 Heport of the 0or"ing Group on the/ompanies Act and clause :9 of listing agreement list out ade(uatel$ the informationthat must !e placed !efore the !oard of directors. To ensure that as$mmetr$ ofinformation for sta"eholders especiall$ shareholders is further reduced the committeerecommends

Recommendation ). : Additional disclosure to directors

19


20/27

In addition to the disclosures specified in Clause 9A under Information to be placed before theboard of directors, all listed companies, as well as unlisted public limited companies with a paid#upshare capital and free reserves of s./5 crore and above, or turnover of s.)5 crore and above,should transmit all press releases and presentation to analysts to all board members. This willfurther help in "eeping independent directors informed of how the company is pro ecting itself to

the general public as well as a body of informed investors.

# . )f audit committees are indeed to !e independent the$ should reall$ consist of onl$independent directors. There 'ere dou!ts on the advisa!ilit$ of e5cluding nomineedirectors of financial institutions from audit committees. The /ommittee preferred to !econsistent in not considering directors 'ith a certain mandate to !e reall$ independent.

Recommendation )./: &ndependent directors on Audit Committees of listedcompanies*udit Committees of all listed companies, as well as unlisted public limited companies with a paid#up share capital and free reserves of s./5 crore and above, or turnover of s.)5 crore and above,should consist e!clusively of independent directors, as defined in ecommendation 9./.-owever, this will not apply to: (/+ unlisted public companies, which have no more than )5shareholders and which are without debt of any "ind from the public, ban"s, or financial institutions,as long as they do not change their character, ( + unlisted subsidiaries of listed companies.

#1. The committee has recommended that the role and functions that an audit committeeis supposed to discharge in a compan$ is clearl$ laid out in an audit committee charter.

Recommendation ). : Audit Committee charter In addition to disclosing the names of members of the *udit Committee and the dates and

frequency of meetings, the Chairman of the *udit Committee must annually certify whether andto what e!tent each of the functions listed in the *udit Committee Charter were discharged inthe course of the year. This will serve as the Committees action ta"en report to theshareholders.

This disclosure shall also give a succinct but accurate report of the tas"s performed by the*udit Committee, which would include, among others, the *udit Committees views on the

adequacy of internal control systems, perceptions of ris"s and, in the event of anyqualifications, why the *udit Committee accepted and recommended the financial statements with qualifications. The statement should also certify whether the *udit Committee met with thestatutory and internal auditors of the company without the presence of management, and whether such meetings revealed materially significant issues or ris"s.

2


21/27

#2. The ma5imum sitting fee permitted !$ the /A is Hs.@ . The committee 'asrepeatedl$ reminded that peanuts fetch mon"e$s. The /ommittee !elieves thatcompanies cannot hope to get the !est talent unless the$ ma"e it 'orth'hile for

professionals to e5tend their time and e5pertise. The committee 'as cautioned that fartoo much pa$ment ma$ itself impair independence Bust as over-reliance on a single clientcompromises the independence of auditors.


22/27

Recommendation ).13: '9emptin non#e9ecuti$e directors from certainlia"ilitiesTime has come to insert provisions in the definitions chapter of certain *cts to specifically e!empt

non#e!ecutive and independent directors from such criminal and civil liabilities. *n illustrative list ofthese *cts are the Companies *ct, ?egotiable Instruments *ct, @rovident &und *ct, $'I *ct,&actories *ct, Industrial


23/27

# . The /ommittee 'as repeatedl$ reminded to !e careful not to increase compliancecost to companies as ultimatel$ not onl$ is this against the interest of shareholders !ut ithas the danger of ma"ing )ndian industr$ uncompetitive. )n this connection a seriousunnecessar$ cost noticed !$ the committee 'as the overlap and duplication !et'een theSE6) and /A. The /ommittee has recommended removal of this overlap "eeping inmind t'o other principles. *irst su!ordinate legislation cannot override provisionsenacted !$ ?arliament. Secondl$ the doctrine of +occupied space, needs to !e respectedand complied 'ith.

Recommendation ,.1: S'5& and Su"ordinate !e islation

'$1I may refrain from e!ercising powers of subordinate legislation in areas where specificlegislation e!ists as in the Companies *ct, /A) .

If any additional requirements are sought to be prescribed for listed companies, then, in areas

where specific provision e!ists in the Companies *ct, it would be appropriate for '$1I to havethe requirement prescribed in the Companies *ct itself through a suitable amendment.

In recognition of the fact that '$1I regulates activities in dynamic mar"et conditions, the


24/27


25/27

'hich the /ommittee feels need to !e rectified as an important step to'ards !ettercorporate governance in )ndia. The principle that ill-gotten gains must !e disgorged fromthe 'rongful gainer needs to !e enshrined in the /ompanies Act.

Recommendation ,.) @enalties ought to be rationali=ed, and related to the sums involved in the offence. &ees,

especially late fees, can be related to the si=e of the company in terms of its paid#up capitaland free reserves, or turnover, or both.


26/27

government to order special audits to allo' the government to order special complianceaudits.

Recommendation ,.,


27/27

gro' if the$ are to compete especiall$ in non-statutor$ functions internationall$. The/ommittee ma"es t'o recommendations in this regard.

Recommendation ,./ IC*I should propose to the >overnment a regime and a regulatory framewor" that

encourages the consolidation and growth of Indian firms, in view of the internationalcompetition they face, especially with regard to non#audit services.

The >overnment should consider amending the @artnership *ct to provide for partnerships with limited liability, especially for professions which do not allow their members to provideservices as a corporate body.

sox,naresh

Documents