Icai recommends stiffer rules after Satyam fraud case
August, 03rd 2010
India's chartered accountancy regulator has urged the government to tighten laws governing the profession to avoid frauds such as the one that came to light at Satyam Computer Services Ltd last year.
A panel set up by the Institute of Chartered Accountants of India (Icai) has recommended that sub-contracting of audit work be more strictly regulated, the names of errant accountants be made public and a corporate governance code be defined for independent directors, audit committees and chief financial officers of publicly listed companies.
The high-power committee made the suggestions in a report to the ministry of corporate affairs (MCA) after its approval by the Icai council, a core group at the regulator entrusted with taking key decisions. The findings were given to MCA, Icai's parent ministry, in May. Mint has reviewed a copy of the report.
"We have made recommendations which are both for better regulation of the profession as also empowerment of auditors in the report," said Amarjit Chopra, Icai president. "The idea is to make sure that scams like Satyam do not surface again."
Hyderabad-based Satyam has been at the centre of India's biggest corporate fraud inquiry after founder B. Ramalinga Raju confessed in January 2009 to having misstated accounts to the tune of Rs7,136 crore over several years. The government asked Icai, one of several agencies investigating the fraud, to look into auditing lapses at Satyam.
"The Icai report is being looked into by MCA," said a senior official at the ministry who did not want to be identified. "It has a wide range of suggestions which the ministry will evaluate and (it will) come up with measures."
The report says all Icai members and auditing firms found guilty of misconduct should be listed on the regulator's website three years after their membership has been cancelled.
Icai is currently investigating the role of S. Gopalakrishnan and Srinivas Talluri, two senior Price Waterhouse, Bangalore, partners who were recently been released on bail. The two were found prima facie guilty of misconduct by Icai along with four others, including V. Srinivas, former Satyam chief financial officer, and V.S. Prabhakara Gupta, former head of the company's internal audit cell.
Gopalakrishnan, who was an Icai council member, was removed as a member of its specialized committees.
According to the report submitted to the ministry, there had been a failure of corporate governance at Satyam. Investigations thus far reveal that resolutions submitted to banks for loans were not even entered in the minutes of board meetings and that the audit committee was unaware of these transactions.
"Therefore, it is recommended that in the case of listed companies, the details of bank balances, loans, advances, both secured and unsecured, should be submitted to the audit committee every quarter," according to the report.
An audit committee oversees financial reporting and disclosure.
The reports also suggested that sub-contracting of audit work be more rigorous. "It is recommended that if a firm for execution of professional work uses the resources and staff of any other member of a firm of chartered accountants, the same may be done in such a manner that it does not dilute the accountability of the firm which has been appointed by the client," the report said.
The report also wants the government to encourage whistle-blowers on issues relating to corporate governance of listed companies.
Prithvi Haldea, chairman and managing director of Delhi-based research outfit Prime Database, declined to comment on the report. He said, however, the Satyam fraud had more than one facet and was therefore difficult to tackle.
"The Satyam case was a fraud, but nobody has been able to detect whether it was a failure of corporate governance on part of the independent directors or others like the auditors and regulators," he said. "It would be unfair to focus only on corporate governance issues as independent directors in the case of Satyam were neither equipped nor had the time to detect the fraud."