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Imperative to have independent auditors
July, 27th 2006

Capitalism at crossroads. Corporate misgovernance in India. Series of scams that shook investor confidence...

With these startling sections begins chapter 1 of Corporate Governance: Principles, Policies and Practices, by A.C. Fernando, from Pearson Education ( "The corporate governance movement in India began in 1997 with a voluntary code framed by the CII (Confederation of Indian Industry). In the next three years, almost 30 large listed companies accounting for over 25 per cent of India's market capitalisation voluntarily adopted the CII code," notes the author.

The book is divided into four parts. The first, on `understanding corporate governance' discusses the underlying theory and landmarks such as the initiatives by the World Bank, the OECD, SEBI and so on. Committees headed by Naresh Chandra, Narayana Murthy and J.J. Irani are significant milestones in the evolution of corporate governance.

Part two is about `agents and institutions', where you'd read about the rights and privileges of shareholders, board of directors, auditors, banks and so on. Fernando has concluded many chapters with case studies that look at real companies. If Indian companies want to be globally competitive in the new millennium, then good governance is an utmost necessity, urges Fernando in the final chapter. "The first requirement of corporate governance is professional management. Even in family-owned companies, where family members often hold the highest offices in companies, it is imperative that such family members are professionally qualified and competent for the office they hold," he says.

Among `current issues' is a paragraph on CRT (Caux Round Table). It is `an international network of principled business leaders working to promote a moral capitalism' founded in 1986 by Frederick Phillips and Oliver Giscard d'Estaing, `as a means of reducing escalating trade tensions'.

CRT lays emphasis on job creation, sustainable practices, trust, and transparency. Importantly, it believes that solutions to complex global issues require the cooperative efforts of business, government and other institutions. "The partnership developed in many cities where business collaborate with local authorities, central government, education, emergency services and special interest groups could be adapted to global initiatives."

The book wraps up on a bitter note about the lack of independent auditors. "It is imperative to have independent auditors who are reputed and above board. Due to the distrust in Indian auditors, most of the multinational companies have insisted that the parent company's auditor should also audit the subsidiary companies in India, often at much higher costs," rues the author.

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