Internal controls have improved since Satyam fiasco
January, 02nd 2010
Almost a year has passed since Satyam founder Ramalinga Raju flung Satyam into chaos after confessing to his role in a major financial fraud. Since then, various government agencies have scrutinised the affairs in the company and much debate has been waged on the role of independent directors and internal control, and even the role of auditors in corporates at large. Porus Doctor, a partner with Deloitte India, which was appointed as one of the auditors by the government-appointed board of Satyam after Raju quit, talked to DNA on corporate governance and internal control issue. Excerpts:
From the corporate side, what all has changed since Rajus confession?
Post-Satyam, certainly a lot of Indian corporates have taken the role of internal auditing very seriously and especially the independent directors are now absolutely focused on the internal audit of the company. There has also been a clear shift in terms of the amount of time they spend on audit committee meetings compared with previous years. Also, there are a lot of questions being asked in terms of how they respond to audit queries and issues related to internal audit function.
Ironically, Satyam was considered a very strong company from the corporate governance point of view until Raju confessed. Do you feel there are more such companies, or was Satyam an aberration?
Satyam is very clearly a very unusual corporate failure because it was the owner himself who was involved. Going forward, I cannot say if there are going to be more Satyam-like cases, but the clients we talk to have taken significant measures to tighten their systems. For example, risk management; a lot of processes are based on risk management at all levels in the organisation and there is a lot of emphasis on issues raised by internal audit. I believe overall governance has been strengthened and tightened as key people have been brought in.
Do you feel the role of independent directors should be expanded more?
I think that would be a knee jerk reaction to Satyam if you are looking to expand the role of the independent directors. The role is pretty well-explained, what needs to happen is that directors need to invest more time - two hours in a quarter in a meeting in a board does not necessarily gives them the right equipment to direct company affairs.
In terms of corporate governance, where does India stand vis-a-vis the developed nations?
I think from a corporate governance point of view, from the existing regulations side, we are pretty much there. It is how effectively they are implemented that is the real question - whether they have been implemented in the right spirit or just for compliance. Take Clause 49. There are ways through which it can be implemented and there is a spirit through which it should be implemented, and that is where Indian corporates should emphasise more.
Salman Khursheed, the corporate affairs minister recently said that auditors should be rotated every six years and also that the role of chairman and CEO should be differentiated. Whats your view?
I have seen what he has laid down and what all is expected from the corporates. When you look from the auditors perspective, you get to know the functioning of the company better and better with time. So, rotating out auditors cannot necessarily be the solution. I do not think that is the answer as an auditor would be able to contribute more efficiently on internal controls with time.
But then, the auditors may also become biased if they stick for too long?
But the auditors role is meant to be independent, if you go by tenet, then he should not have close contacts with the management.
Khursheed also mentioned that an independent director should not be on the board of more than seven firms as that may hamper his performance. Whats your take on that?
Without getting into whether it should be seven or ten - that is a subjective number - I completely agree with that. It would ensure that an independent director is able to invest more time with the operations of the company. But having said that, Satyam had a glorious list of directors on board and still the fraud happened. So, one needs to be careful. One trend I can see is that now directors are more focused on internal controls and clearly there is an unprecedented change in terms of professionalism in the corporates.