Internal audit with defined accountability , joint audits, limiting the number of directorships for Independent Directors(IDs), unlimited tenure of IDs on Boards of Companies, model code of conduct, adequate remuneration along with commission, non rotation of auditors are some of the suggestions put forward by PHD Chamber in its paper on “Strengthening Corporate Governance & Code of Conduct for Independent Directors”, submitted to Mr. Salman Khursheed, Minister of State for Corporate Affairs, Government of India.  The Chamber has forwarded the suggestions in the wake of the New Companies Bill to be introduced in the Parliament.

According to Mr Lalit Bhasin, Chairman, Corporate Affairs Committee, PHD Chamber, Internal control mechanisms play a crucial part in the corporate governance structure. Statutory auditors have a limited role in the internal control mechanisms of a company as they devote only a limited amount of time. Internal audit can give more derived benefits if it is coordinated with the statutory audit in the right manner and can be instrumental in encouraging risk management.

Unfortunately, in most of the companies internal audit seems to be taken merely as a help to the management with no defined accountability. Even the MAOCARO (Manufacturing and other Companies (Auditor’s Report) Order / CARO (Companies (Auditor’s Report) Order)  only make a brief mention about the need for internal audit. Although Clause 49 of the listing agreement does require a review of the adequacy of internal audit function, review of internal audit reports and discussion with internal auditors as a part of the Audit Committee’s role, however, it does not provide the necessary requirements with respect to internal audit to be followed by a company.

Statutory regulations should govern internal audit to strengthen this function and make it conducive to provide preventive control mechanisms for risk management and also to enable fraud detection. Also Internal auditors may be required to give a certification to the effect that the internal control mechanisms in the Company  are adequate and functioning effectively so that he can work fearlessly and  able to report about his level of satisfaction with the internal control mechanisms of the company. The statutory regulations would help provide adequate powers and independence to the internal auditors.

The internal auditor in consultation with statutory auditor should prescribe the broad format for reporting their findings to ensure that relevant and material facts are brought out in the report and the irrelevant details are filtered out.

According to Mr Bhasin the Institute of Internal Auditors should be strengthened and restructured.

Mr Bhasin has also emphasised that the expected role of Independent Directors  needs to be redefined and re-examined, keeping in mind the basic objective behind inviting these directors on the boards of companies and should be provided with adequate immunity to safeguard their interests against potential action. A model code of conduct should be prescribed for the IDs to enable them to discharge their role more effectively.

The remuneration of ID s should be adequate, commiserating with the time and effort devoted by them, excluding Employees Stock Options while, commissions could continue to form a part of the remuneration. Limited directorships will let the IDs have involvement and balanced decision making as time is limited with the directors. Frequent change in their tenure may hamper the effectiveness of  the IDs who acquire the knowledge and expertise on the company's affairs over a period of time. 

Similarly, non rotation of Auditors would make them more effective and contribute effectively with greater acquired knowledge and learned nuances.  Joint audits may take place depending on the size and scale of the company.  Focus of audit should be further expanded beyond verifying the true and fair nature of financial statements, to include greater review of specific elements of business performance which can reveal frauds and mis-statements.

PHD Chamber strongly suggests companies, particularly listed companies, to have periodical forensic audits to be undertaken though this should be only on voluntary basis

 

Anjula Singh Solanky
Dy. Secretary-Media Relations
PHD Chamber of Commerce and Industry