MSc Corporate Accountability Assignment

MSc Corporate Accountability Assignment

Assignment Help Australia presents you solution of Corporate Accountability Assignment that is part of MSc Strategic Accounting & Finance subject. It has 2 parts.

There have been many disturbing revelations of causes related to Political, bureaucratically and corporate corruption by the Indian Media. This has been a cause of concern for the citizens of India and the people are not ready to tolerate any such cases of corruption any further. Recent studies conducted by Transparency International suggest have made astonishing revelations; one of which says more than half of the population of the country has had first-hand experience of corruption. The survey also estimates that Billions of Dollars is being lost every year due to the corrupt practices. In the year 2011, India was ranked 95th in the Corruption Perception Index out of a total of 178 countries.

The recent scam which shook the Indian corporate sector and made a dent in its growing Information Technology Industry is of Satyam Computer Services Ltd. Shrija Agrawal, & Ruchika Sharma. (2009)

 Introduction:

Satyam Computer Services Ltd. was founded in 1987 by Mr. B. Ramalinga Raju. The company was known for providing superior in a cost effective way. This Indian MNC provided its services to a variety of sectors and was also listed on the New York Stock Exchange and the Euronext. The firm’s network was spread in over 67 countries across six continents. Apart from this, the company also had a huge work force of more than 40000 IT professional at its development centres spread across the globe. Before the discovery of the scam, the company catered to more than 650 Global Trade organizations, 185 of which being Fortune 500 companies. Satyam in Sanskrit means Truth, thus inspiring Trust. Tabrez Ahmad & Tabrez Malawat & Yashowardhan Kochar & Ayan Roy, (2009)

It was on the 7th of January, 2009 when the Chairman of Satyam Computer Services Ltd. Mr. Ramalinga Raju decided to make the confession about the major accounting scam taking place at Satyam. The confession revelled that for several quarters, the firm had been overstating its profits and assets by means of fudging with its books of accounts. The auditors of the company were believed to be involved in this scam too as this fudging with the books of accounts and auditing evidence had been going on for many previous quarters and the auditors had been giving the company a clean chit. Vikas Bajaj & Keith Bradsher, (2009). Incidentally Satyam had paid its auditors twice the amount above the industry standards.

The report was a dent in the image of corporate India. Beverly Behan, (2009). There were massive trading loss with the securities markets plummeting and the general public including the retail investors losing a huge amount of money due to this lack of corporate law governance in part of Satyam Computer Services Ltd. and the statutory auditors; one of the big four appointed by them. Ronojoy Banerjee, (2009).

Recommendations:

The Satyam scandal sparks a big question on the sustainability of Indian corporate houses; it also poses the question if India has adequate laws in place to take care of the issue of corporate governance. (2009). Text of Mr, Ramalinga Many experts argue that there is no dearth of such laws in India, however the implementation and the effective tracking of the implementation of these laws is what causes the major concern in the Indian corporate sector. (2009). Satyam Saga

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I would like to suggest that the law makers in India follow a principal based approach such as the case of combined code followed in the United Kingdom for compliance with the law where in the factors such as the nature, the size and the size of the business define the corporate governance rules and regulations that the company must follow, rather than following a standardized corporate governance procedure as followed in the United States. There is also a need for a review of the corporate governance structure and the corporate governance rules present in India. (2009). SEBI

The major trouble that India faces is that it follows a corporate governance rule that has been taken from other countries rather than formulating its own corporate governance rules and regulations.

The performance and the contribution of the individual directors should also must be considered and evaluated once the director or the executive director has been appointed.  There should also be a proper background check that should be done on all such directors so as to make sure that they can contribute significantly to the board and that there is no conflict of interest that arises. Also, it must be taken care that these directors act in the best interest of the shareholders, steps must be taken to insure that the independent directors are not dummy acting on the behalf of the managers per say. (2009). SEBI

There should also be a cap or a guideline on the way the directors are appointed and also on the performance evaluation of such directors, any loophole in the process must be evaluated and rectified. The watchdog of the industries in India SEBI Securities and Exchange Board of India must take care that such incidents are not repeated in the future under any circumstances. The challenge that is to be taken care of by the Indian companies is that not only well known persons can be appointed as Directors, but it must also be taken care of that people who are qualified for the position and can bring in value for the shareholders are required to take up the job of directors in the company. Although the role of the corporate director has come under scrutiny many number of times, there is still a great deal that needs to be done in this regard. (2009). SEBI

Secondly, it must be noted that the shareholders of the company place a high degree of importance to the auditor’s report and they go by the auditor’s report to make their investment decisions in the company, the auditors and the statutory auditors must take care to put in utmost care that the company’s financial statement are proper and error free they must see to it that there should not be any material errors on the book of the company and that no illegal transactions are being made. (2009). SEBI There is a need to strength the internal audit capabilities and the power given to the auditors.

A few recommendations that can be acted upon are:

Appointment and the remuneration of the auditors should not depend on the company that they audit; instead it should depend on a fixed remuneration as the fees that they get can influence their findings. Also the stock exchanges can select and appoint auditors on behalf of the company; this would further reduce the risk.

Forensic auditors should also be appointed who can unearth such tasks of wrong doing which the management might want to hide.

These auditors can approach the company with proposals that are illegal in nature and can test as to how the company behaves or reacts to such requests. The Auditors should use the AAS Auditing and Assurance Standards which is a benchmark in the auditing industry for the audit quality. (2009). SEBI

The performance should be measured and disclosed at an appropriate period of time and the gap between the assessment and reporting should be reduced to the minimum. AAS-4 mentions that the responsibility of the auditor lies in the proper presentation of the accounts and in providing an unqualified review of the accounting books. Apart from this, the auditors must also ensure that they are using third party evidence to come to their conclusion. A proper fraud assessment should be done so as to be sure that the shareholders’ interests are being met. Independent directors too must act in the best interest of the shareholders and see to it that the shareholders interest are being met with whatever actions  that are been taken by them, all this would help the company to grow and have a sustainability in the future.

The pending bills in the Indian Parliament with respect to the Companies Bill and the Limited liability act should be reviewed and passed at the earliest as this would make the act more stringent and avoid the management to shake off their hands by misuse of the limited liability clause as mention in the rule book.

ROTATE THE WATCHDOGS: FIXED, FINITE AND ROTATING TENURE

It is possible for the auditors and the directors of the company to misuse the powers that they have, to prevent such misuse, they must act in the best interest of the shareholders, they must understand that they are the first line of defence that the shareholders have against the management of the company and if they default it could lead to the shareholders being misled. The auditors should have a fixed tenure of at least three years with a fixed compensation as decided based on the industry standards. Tis would lead to the auditors being able to do their job properly and in a constant fashion. At the end of the fixed tenure of the auditor, it should be mandatory to appoint a different auditor again for a fixed period of time, it would mean that any inconsistence that the previous auditor had can be notified by the new auditor. (2009). SEBI

MAKE INDEPENDENT DIRECTORS TRULY INDEPENDENT WITH A FINITE TENURE

A lot of issues with respect to the independent directors arise because there is an absence of the fixed tenure that they have. I would suggest that that for the independent directors to be able to act in an independent fashion, it must be made compulsory for the firm to appoint independent directors for a lifelong period who can be removed only by the shareholders of the firm or by the stock exchange. This would mean that the independent directors can act in the best interest of the company without worrying about losing their tenure. This would help the independent directors to make decisions in the best interest of the company and the benefit of the shareholders and not being pressurised by the management of the firm to take decision which is in best favour of the people managing the firm.

It is a common practice that the independent directors are selected for the job because of their close proximity with the existing directors of the firm, there is an undue influence that these directors and the senior management of the firm has on the independent director which is harmful for the corporate health of the company. There are serious conflicts with respect of the discharge and allocation of duties and responsibilities. Also, many of the independent directors are not technically and professionally qualified to take up the position; however they are selected to act as independent directors due to the vested interest of the executive directors, this raises serious conflict of interest within the board. Further, just like the auditors the independent directors too should be selected for a fixed period of time, this would lead to the independent director’s act in the best interest of the company and not being pressurised by the senior management to act as directed by them. These directors should be appointed from a selective pool of qualified and trusted professional from the industry; such a pool can be formed by nominating members which can be done by the watchdog of the industry, in case of India the SEBI Securities and Exchange Board of India can take up the responsibility for implementing such a scheme. There should be clearly set and defined guidelines as to who can be selected for the post of the director and what is the qualification necessary for being selected as the independent director for a particular industry. There should must be a process of open vetting for this proposal to be a successful one, the internet and other technological platforms can serve as a very useful tool for the same.

To curb this issue, the watchdogs of the economy and companies should also be divided upon into various teams depending upon the experience and reputation in the case of the auditors and upon experience and qualification in the case of independent directors. After this, the watchdogs must be matched with the company in order of the experience that they have and a suitable match for the independent directors must be found. The company should receive a choice as to which of the independent directors it wants to have. There should also be a holistic feedback mechanism which would monitor the performance of the watchdogs and would keep an active movement between the various categories depending upon the skill sets that the individuals pose. (2009). SEBI

A market driven compensation package for these watchdogs must be developed to keep it free from any kind of conflict of interests.  The compensation package should be reviewed every three years to keep it updated and the subsidiary of the parent company must have different auditors than that of the parent company. Many a times the business and the transactions that happen in the subsidiary company is not evaluated in the same way as they are done with respect to the parent company, this leaves a gap in the regulatory framework. Subsidiary which is over a particular size in percentage terms to the parent company must be evaluated differently and it should be audited by an auditor different from that of the parent company. All this combined with a rotation policy for the auditors in which the auditor is with the company for a fixed period of 3 years after which it is compulsory to have a different auditor would help in minimizing the possibilities of a conflict of interest arising.

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INSTITUTIONAL NOMINEES ON THE BOARD

These days, for most of the companies, Pension Funds, Mutual Funds and FIIs hold a substantial portion of the total equity base which is mostly larger than the share of the promoters of the company. The owners of these shares are ultimately the retail investors or shareholders who hold the stake by means of investments into the particular fund.  The same pool of independent directors could be utilized to have them nominate their directors on the boards of various companies.

Although there is a need for the business community to inspect its own actions and the act of ignoring the ill deeds of corporate India, we believe that acting together the community as a whole can act as a significant actor of change. However, there are still chances that by the time these changes are acted upon and the appropriate rules and regulations come into force there would be many such Satyam stories and the need for the hour is that there is a strict and genuine effort by corporate India to follow the strictest and the best standards in term of Corporate Governance so that the Satyam saga is not repeated.

Part B

Current Position of the Stakeholders:

The stakeholders have viewed and taken the situation in a different way, all the different stakeholders have different position when it comes to the issue of corporate governance.

In the case of the Management of the company including the executive Directors and the top management of the companies, they view corporate governance as a tool for gaining investor trust and confidence. It is a mechanism for them to promote the company as a well-managed firm. The directors of the firm must take care that they are acting in the best interest of the company. They shouldn’t view corporate governance as an liability that they have to fulfil, but they should rather view the task of corporate governance as an act of building trust and reporting to the real owners of the firm which are its shareholders, this is the mind-set that the managers and the directors of the company must have in order to have a good corporate governance possibility in the organization. Also, they need to have a view towards the society, they must understand that what they do reflects on the overall economy as well, one Satyam scandal has made a dent in the image of corporate India making its stock index to tumble and breaking the investors trust in the growing economy of the country, the managers and the directors must understand that it is critical that such issues are avoided.

With respect to the independent auditors, a few of the recommendations that can be acted upon are Appointment and the remuneration of the auditors should not depend on the company that they audit; instead it should depend on a fixed remuneration as the fees that they get can influence their findings. Also the stock exchanges can select and appoint auditors on behalf of the company; this would further reduce the risk.

Forensic auditors should also be appointed who can unearth such tasks of wrong doing which the management might want to hide.

These auditors can approach the company with proposals that are illegal in nature and can test as to how the company behaves or reacts to such requests. The Auditors should use the AAS Auditing and Assurance Standards which is a benchmark in the auditing industry for the audit quality.

Auditors must keep in mind that they are the first line of defence that the shareholders have against the management of the firm and f they default it would be very difficult for the shareholders in general to have a trust on any of the companies.

Employees too should have the right to be consulted. To have better corporate governance, the employees must be consulted by the senior management on specific point in times on a regular basis; this would help them in contributing significantly. The auditors too must get in touch with the employees of the firm on a regular basis to find out about the internal happening of the company and to make appropriate recommendations to the same. It is imperative that interacting with the employees in the various departments would give the auditors a better view and would help them in understanding in depth the condition of the firm.

The independent directors of the firm must also understand that their task does not end by simply attending the meetings, hey need to significantly contribute towards the decision making process, they should understand that they are in the position of trust and that the shareholders have a trust entrusted on them. They should take care that proper and the best corporate governance guidelines are followed by the firm in all circumstances and that there are no deviations from what is planned. Also, they must take care that they look into the timely and accurate reporting of the financial statements by the company and appoint independent statutory auditors. They must also seek to resolve any internal issues arising due to the conflict of interest between the management and the shareholders. (2009). SEBI Ultimately, the task of the firm is to create wealth for its shareholders and to do good to the society it is in.

Lastly, the regulators of the economy must make it compulsory that strict corporate governance guidelines are formed so that such scams and scandals are not repeated in the future. They must understand that such incidents are a shame of for the entire economy and the people are no longer ready to agree to such incidents. The auditors must make rules and regulations that serve to protect the interest of the small shareholders. These rules and regulations must be reviewed on a timely manner and efforts must be made to see to it that these rules are not being misused by the corporates. There should be a timely review of all such rules as formed by the regulators and act of misuse of misinterpretation by the corporates must be bought in public. Also, there must be stricter charges for those violating the rules or delaying the implementation of the same. (2009). SEBI

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These are the steps which are necessary to be taken in order to have a fundamentally strong and robust corporate governance framework into place, it is important that the corporates do not play with the intent of the law and rules regarding corporate governance and that they understand the kind of implication their actions have upon the economy as a whole. (2009). SEBI

Possible scenarios that the Minister can put to the government to satisfy all stakeholders regarding Corporate Governance and Accountability.

Numerous articles are devoted to the topic of corporate governance and the inherent conflict between shareholders and stakeholders (e.g. Jensen, 2001; Mintzberg et al., 2002; Sternberg, 1997; Vinten, 2001). Stakeholder orientation implies that a company should be run in the interests of all its stakeholders rather that just the shareholders (Rose & Mejer, 2003)

There are a number of suggestions that the Minister can put forward to the government to satisfy all stakeholders regarding Corporate Governance and Accountability.

Director/Independent Director competence: In order to discharge the responsibilities as a board member, the director or the independent director must be technically and professionally qualified to take up such responsibility. So it is suggested that the watchdog of the companies take up such responsibilities to make sure that the shareholders’ interests are met.  The selection or the nomination committee for the directors should device a proper plan to formulate the competencies and the desired skill for the role. The evaluation and the skills and competencies of the director must have a major role in the selection or the nomination of the director. In India it is a common practice to have a well-known person as the director for the business, this practice must be changed. The director should be such so that he or she improves the competency of the board as a whole.

Renewal of the Board:  The renewal of the board is critical when it comes to evaluating the performance of the board as a whole. It is critical that the directors are conscious and know about the duration of the directors, also, there should be a proper succession plan in place. The government should make it mandatory that the board be renewed after regular intervals; also there should be provisions for the independent directors with respect to the term that they are to serve. In case of independent directors, it is advisable that the government makes it mandatory that such directors have a fixed term and are changed only with the permission of the industry regulators.

With respect to the statutory auditors, the compensation for such auditors must not be fixed based on the industry standards. Also, the stock exchanges can select and appoint auditors on behalf of the company; this would further reduce the risk.

Forensic auditors should also be appointed who can unearth such tasks of wrong doing which the management might want to hide.

These auditors can approach the company with proposals that are illegal in nature and can test as to how the company behaves or reacts to such requests. The Auditors should use the AAS Auditing and Assurance Standards which is a benchmark in the auditing industry for the audit quality.

All these steps are critical for the country to thrive on the growth story and avoid the occurrence of such scams that make a dent in the corporate world and lead to a loss of trust by the investors. Such rules and regulations if forced in by the government would help in investors gaining trust in the entire industry and it would also help the economy as a whole. However, the corporate sector must respect the intent and the spirit associated with Corporate Governance and Business Ethics.

References

Books

  • Davies Paul L., Gower and Davies Principles of Modern Company Law, eighth edition, Sweet and Maxwell, 2008, London.
  • French Derek and Ryan L. Christopher, Company Law, 25th edition, Oxford University Press, 2008, New York.
  • Hopt K., Comparative Corporate Governance, Oxford University Press, 2005, New York.
  • Majumdar A.K. and Kapoor G.K., Company Law and Practice, 13th edition, Taxmann Publication, 2008, New Delhi

Articles:

  • Agrawal, S., & Sharma, R. (2009, June 20). Beat This: Satyam won awards for corporate governance, internal audit. Retrieved July 3, 2012, from VC Circle: http://www.vccircle.com/news/technology/2009/01/09/beat-satyam-won-awards-corp-governance-internal-audit
  • Tabrez Ahmad & Tabrez Malawat & Yashowardhan Kochar & Ayan Roy, (2009, June 30). Satyam scam in the contemporary corporate world: a case study in Indian perspective. SSRN, Retrieved July 3, 2012, from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1460022

Statutes -:

  • Companies Act, 1956
  • ICAI, 1949
  • Indian Contract Act, 1872