Need for the right independent directors and auditors

The gross corporate misdemeanors reported by Indian and overseas financial analysts make it imperative to revisit the process of appointment of independent directors and auditors—statutory and internal

The CBDT (Central Board of Direct Taxes) chairman-headed report on black money suggestion to set up a regulator to empanel statutory auditors for corporate India is a long overdue solution to the gross financial irregularities resulting in massive corporate frauds in GTB, Satyam and now Addidas-Reebook.  

Corporate practices and good governance norms mandate that the board of directors induct some directors and appoint statutory auditors, both of which are expected to be truly independent, unconnected with companies/promoters/managements, completely free of conflicts of interests and insulated from the influences of the promoters or company management.

The most important and critical cogs in the wheel of good corporate governance are the offices of the statutory and internal auditors of companies who are well-read and experienced accounting and audit professionals in their own right having audited entities across the board and not anyone just practicing taxation.

The stake holders have tremendous of expectations from the auditors—both statutory as well as internal. The degree of care and diligence expected from both these functionaries has undergone sea change the world over. The stake holders, who are now more than the majority shareholders, no longer expect the auditors to provide them clean bills of health to corporate managements as was done hitherto. This is more particularly when more and more gross financial irregularities have been coming to light post audit. It began in the West with Lehman Brothers, Enron, Tyson, BCCI, Palmart, et al. In India with GTB and Satyam, and latest on the list Adidas-Reebok.

The reports of gross corporate misdemenours reported by Indian and overseas financial analysts—the mismanagement in a domestic airline company, different set of audited numbers submitted to the authorities by a telcom company, the veracity of results of a listed reality company questioned, alleged irregularities in a footwear company resulting in criminal complaints, all make it imperative to revisit the process of appointment and subsequent renewals of the auditors.

The other critical issue is—how long should the company managements alone be entitled to continue with the present practice of appointments of the independent directors and auditors only by an internal proposal moved by the board of directors? More particularly when both the directors as well as auditors being emboldened to their appointers—the company boards and managements and the appointees forfeiting whatever is left of the modicum of independence.   

An independent regulator or body or panel has to maintain a data bank of eminent personalities and auditors to bring about more transparent appointments of independent directors and auditors more particularly for widely held companies with high public stakes. This appointment panel ought to be put in place in consultation with the regulators like SEBI, IRDA, TRAI, RBI, ICAI and ICSI.

Today there exits listings of audit firms with the Comptroller and Auditor General of India (CAG) and the Reserve Bank of India (RBI) containing authentic data. Similar listing of eminent qualified and experienced personalities needs to be created for selecting independent directors. It can be culled from retired auditors, directors and executives. The panel can propose at least three names to enable the company to select one.

This idea of outside oversight in the monitoring of company affairs has brought about  the concept of independent directors who are eminent personalities and/or professionals to bring in vital inputs and advice on the boards of companies that generally constitute promoters’ or managements’ appointees as other  members of the board of directors.  Independent directors are considered critical pillars of corporate governance as effective tools of an oversight body to protect the interest of stakeholders like investors at large, more particularly minority interests, vendors, suppliers, employees and lenders.  

Being external and unbiased, the independent directors are expected to bring about different perspectives and provide fillip with their qualifications and expertise striking a right balance between growth and governance. As effective contributors they bring in wider knowledge, experience, insight, skills and industry expertise for the company to profit when they voice genuine concerns, put out searching questions. They are also expected to have constant interaction with executive management, review company and industry publications—particularly from competitors and not merely accept the data submitted in the board folders containing discussion papers but to spend quality time, not merely putting in token presence or act as ornamental artifacts in the board room to collect fat sitting fees and commissions.

An AT Kearney study in 2007 reported that only 39% listed Indian companies followed any formal process of selecting members to their boards and that a whopping 90% of the so-called independent directors were picked out of the old boys’ networks of company chairmen or CEOs. There is a raging controversy over the appointment of a close relative on the board of Indian Hotels which violates the unchartered ‘independence’ norms. Taking advantage of grey areas?

This seeks to address the concerns of conflicts of interests in public appointments to protect the stake holders.

(Nagesh Kini is a Mumbai-based chartered accountant turned activist.)

nagesh kini
1 decade ago
Doesn't payment of hefty sitting fees - earlier it was pegged at Rs.250/meeting - along with commissions now running into crores, ESOP all not compromise their so-called "Independence" ?
Why are the same names repeatedly chosen from the bowl of which contains only the names of certain 'bigger' wigs who hop from one Board Meeting to another - Tea/Coffee at one followed by a lunch at another,dessert at the next, cocktails followed by a dinner at end of the day?
Do they merely breeze in to ask "Khem Cho, Maja ma?" and rush out for the next?
The maximum number stipulated by law excludes private cos., trusts, NGOs and Trade associations. Not to mention the Govt. Committees that are galore.
R Balakrishnan
1 decade ago
It is high time the world gave up the ghost of 'independent' director. Simply impractical. If the promoter does not know you, he will not have you on board. And no one wants a truly independent director. If someone is forced on the board, all he will know is from the board meeting papers. Let us have laws for punishing executive directors which are strong.
As regards auditors, the best option is to have a panel and have compulsory rotation. In fact, in the middle east, there is a tender system at each AGM where any auditor bids and then there is a short list. Even this gets fixed.
When the ICAI makes rules to please industry, what independence can we expect from a CA firm? And more important, it is not possible for a CA to know everything that happens. How can a SBI be audited even in one year? Or a Reliance or an Infosys?
Everything goes on good faith.
Time that punishment for white collar crimes were made stringent and made in to non bailable offences. That is the only way out.
Rajkumar Singh
Replied to R Balakrishnan comment 1 decade ago
If the intention is to commit a crime, no severe punishment can deter the wrongdoer from doing it.
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