CORPORATE GOVERNANCE: AN INDIAN OVERVIEW- I
It was in 1990’s when India opened its doors to the world. Since then India is the one of the largest growing economy in the world. Despite of opportunities there had been a significant rise in financial frauds which resulted Indian government to enact stringent laws. In 1998 the Confederation of Indian Industries (CII) published a desirable code of Corporate Governance (herein after referred as CG) which some companies’ adopted. In 2000 under the chairmanship of Mr. Kumar Mangalam Birla Committee set up by Securities Exchange Board of India (SEBI) introduced ‘Clause 49’ in listing agreement to promote Corporate Governance. Since then various amendments have been made. SEBI in October 2004 further introduced various amendments in the said clause. The revised Clause 49 came into the force wef 01 January 2006.
Today corporate governance is looked upon as a distinctive brand and benchmark in the profile of Corporate Excellence. In India the issue of Corporate Governance has issued lot of importance.
Meaning
Corporate Governance primarily focuses on complete transparency, integrity, and accountability of the management with an increasingly greater focus on investor protection and public intrest.
According to Sir Adrian Cadbury CG is “exercise of power in a responsible way”.
Corporate Governance is the system by which companies are directed and governed by the management in the best intrest of the stakeholders and others ensuring better management, greater transparency and timely financial reporting.
In brief CG is not just having various committees but ensuring that the suggestion given by that are transparent benefiting not only shareholders but also the stakeholders. The 3 aspect of corporate governance includes accountability, transparency, and equality of treatment for all stakeholders.
World Overview
United Kingdom
UK was the first country to adopt the CG Principles in the year 1990. The Combined Code on Corporate Governance (Revised 2008) issued by financial Reporting Council, London deals with CG issues.
United States of America
Financial scandals in many of US companies like Enron, World com, Global Crossing resulted US Congress to pass ‘Accounting Industry Reform Act-2002’ widely known as Sarbanes Oxley Act and changes in New York Stock Exchange Listing Rules.
Germany
In Germany CG is followed through a code known as Cromme Code 2002. The code was further amended in 2009.
In the next part we will discuss about features of Corporate Governance in India & Clause 49A of listing Agreement.
HALF YEARLY INTERNAL AUDIT MANDATORY
Half yearly internal audit has been made compulsory for stock brokers by SEBI. SEBI a premier body which regulates the securities related issues. The internal audit should be done only by an independent qualified Chartered Accountant, company secretaries, or cost and management accountants who do not have any conflict of intrest. For more log on to SEBI Website
FINANCIAL AUDIT –A TOOL TO AVOID FINANCIAL FRAUDS -III
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Vat Audit
Vat Audit is a popular concept in foreign countries. Countries like France & Korea have made VAT audit compulsory to keep a check on tax evasion. The concept of VAT audit is new for India. But most of the states have incorporated the audit provisions since inception. Especially some states like Maharashtra, Karnataka & Kerala have made detailed audit report compulsory if the gross turnover exceeds the specified limit mentioned in Act.
In Maharashtra Tax Audit has been introduced in VAT. There are two sections in the MVAT Act, 2002 which deals with audit i.e. sec. 22 & sec. 61.If one of the following conditions are fulfilled, the dealer is liable to get his books audited by a Chartered Accountant or Cost Accountant. (1) If the Turnover of sales or purchases exceeds Rs.40 Lacs during the financial year, and (2) A dealer or person who holds license in (i) Form P.L.L under the Maharashtra Distillation of Spirit and Manufacture of Potable Liquor Rules, 1966 or (ii) Form B- RL under the Maharashtra Manufacture of Beer & Wine Rules, 1966 or (iii) Form E under Special Permits & License Rules, 1952, or (iv) Forms FL –I, FL – II, FL- III, FL – IV under Bombay Foreign Liquor Rules, 1953, or (v) Forms CL- I, CL- II, CL- III, CL/FL/TOD – III under the Maharashtra Country Liquor Rules, 1973, such dealers are required to get their returns and accountants audited by CA or CWA. They have to submit the report of the same in Form No. 704 to the department within 10 months from the end of the year to which the report relates i.e. on or before 31st January each year.
Sec 29 of the MVAT Act deals with penalties. If the dealer fails to comply with the notice given U/s. 22, for any purposes, a penalty of Rs.1000/- may be levied. Whereas U/s. 61 if the dealer fails to furnish audited report in Form No. 704, a penalty equal to (1/10) th % of total sales or total purchases whichever exceeds Rs.40 Lacs in turnover or where both exceed, lower of them as the case may be or Rs.1 Lac, whichever is less is charged.
Advantages
(1) The financial audit safeguards financial interest of persons who are not directly associated in day to day matters of management. (Sleeping partners, non executive directors etc.) (2) Bankers and other financial institutions require the audited financial reports for loans and other borrowings, monetary assistance for determining creditworthiness of the borrower. With the help of these audited reports the banks conducts the financial feasibility before approving the loan proposal. (3) Audited A/c helps in settlements of accounts of the retiring & deceased partners/ directors. (4) For receiving grants from central, state governments and foreign countries. (5) It helps in maintaining the records up to date while it also acts as moral check on employees. (6) Audited A/c helps in early detection of frauds and errors. The risks of frauds and errors get minimized as the audit is conducted by an independent auditor. (7) Auditing helps in determination of value of business at the time mergers, acquisitions and amalgamations.
Conclusion
As the India is one of the top emerging booming economies with a steady GDP growth of about 8.5%. With the huge money inflows the risk of fraud gets increased. Recently the most accounting firm KPMG (Klynveld Peat Marwick Goerdeler) surveyed Indian Corporates and came to the conclusion that over next two years i.e. by 2010, ‘India will be a fraud Haven’. They also surveyed that 75% of frauds remains undetected.
So it becomes necessary to keep a check on financial frauds. One of the measures to keep a check on these is to get the books of accounts audited by professional auditors
FINANCIAL AUDIT –A TOOL TO AVOID FINANCIAL FRAUDS
In today’s economic environment, information and accountability have vital role for any business to flourish. The information which the business organization provides should be accurate and reliable. To ensure the reliability and the accuracy, audit is not only necessary but is also indispensable.The most general definition of audit is an evaluation of a person, organization, system, process or projector product. As per Auditing and Accounting Standards (AAS – 1) issued by ICAI, Auditing involves the examination of financial information of any entity, whether profit oriented or not and irrespective of its size and legal form. The objective of audit is to express an opinion on person, organization, system etc. This can be achieved by evaluating the working process during an audit on test basis. The opinion regarding the reliability of financial information is expressed by a phrase ‘a true & fair view’. The opinion expressed by a certified accountant is neither for a particular assest or liability nor for income or expense, but a whole.
Modern definition of Audit
The modern definition of auditing as per ICAI is as follows:
‘Auditing is defined as systematic and independent examination of data, statements, records, operations and performances (financial or other wise) of an enterprise for a stated purpose. In any auditing situation, the auditor pursues and recognizes the proposition before lining for examination, collects evidence, evaluates the same and on the basis formulate his judgment which is communicated through his audit report.’
Traditionally the term audit is mainly associated with ‘audit of financial statements’. As the economy progressed the people accepted that anything could be audited. The following are the criterion’s necessary while auditing:
1. There should be verifiable facts.
2. After verifying the facts it should be compared with the objective criteria. This helps in expressing an opinion of the verified things with the criteria.
The ICAI has issued 34 AAS; except AAS 31, 32, 33 all others are applicable and mandatory for audits.
Audit systems should be in accordance with the generally accepted Auditing Standards set by governing bodies that regulate the profession. It only provides reasonable assurance (i.e which is based on some logical reasonings) for third parties or external users that financial statement presents a true and fair view of companies’ financial condition and results of operations. In audit the level of assurance is high but not 100% and moderate in case of review. The term ‘True and Fair view’ differs from auditor to auditor as it is a relative term.
Purpose of Audit
Objectives are the end results towards achievements of which efforts are directed. The audit objective means the end result which we get by under taking the audit process. The objectives of audit are (1) Primary objective (2) Secondary objective.
Primary objective is to examine the financial statements. In only gives express of opinion on truth and fairness of financial information. Secondary objective deals with detection of errors and frauds.
The auditor is concerned with fraudulent acts (acts performed with the intention of fraud) and not altogether with frauds, which can cause material misstatement in the financial statements.
Types of Audit
The professional auditing in India can broadly be classified under two heads: (a) Statutory Audit (b) Voluntary Audit. Statutory audit further can be classified into (i) Special Audit (ii) Cost Audit (iii) Tax Audit by independent Auditor (iv) VAT Audit. Statutory audit is done particularly to satisfy the legal obligations imposed by law. Voluntary audit is done only for our satisfaction. It is done only to verify the internal management systems are working properly or not.(to be continued……….)