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'Audit firms, not just CEOs, must be pulled up for fraud'
December, 14th 2009

It's a year now after the attempt to merge Satyam and Maytas, the abortion of which probably triggered Rajus confession letter divulging the accounting fraud (on a truly Brobdignanian scale) in Satyam. But what has changed in the sphere of corporate governance since then? Certainly, there is now far greater awareness of the need for more active boards, and their closer supervision and greater scrutiny of management proposals and action.

Industry bodies have set up groups to study corporate governance at length. The CII has, through its Naresh Chandra committee, evolved a suggested code for corporate governance. The government, currently in the midst of finalising a new Companies Bill, is itself considering certain regulatory provisions to focus on corporate governance.

Directors and boards need to deepen their involvement in the company. This is possible only if they spend more time in understanding the company, its business, structure and the market environment. A formal induction programme for new directors will help greatly, as also limiting the number of directorships that an individual can hold (five to six maximum). A meeting of independent directors should precede and/or follow every board meeting, and they should have a meeting with the external and internal auditors (separately) without the presence of other directors or management.

It is necessary that directors have appropriate experience, and that they are persons of proven integrity. Independent directors should be truly independent: a condition that is only partially satisfied by the regulatory requirement of their not being related to the promoters. Independence comes more from true professional integrity, combined with a degree of healthy scepticism. The latter may be best achieved by limiting the continuous term of an independent director to six years in any one company, with a cooling off period of three years.

New directors will bring fresh perspectives and ask different questions. Similarly, the term of the external audit firm must be limited (may be three years), and the concerned partner rotated after two years. Punitive action should be mandated against audit firms (not just individuals) found guilty of negligence.

None of the above suggestions should be used or seen as a means of diluting in any way the responsibility of the CEO and management. It is they who should be held accountable for any fraud. Independent directors should not be charged or harassed unless proven to have wilfully caused damage to the company or misled its shareholders or the public.

There are three prime lessons from the Satyam saga. First, that values and ethics are paramount and the best defence against wrong-doing. Second, that intervention by the government is sometimes necessary, but that its role is best served by putting in place good professionals and then stepping back. Finally, it is possible for the government, industry and professionals to work together cohesively and achieve the near-impossible.

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