• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

Rabindra Nath Sinha

KOLKATA, Feb. 6

THE recent report of the Naresh Chandra committee on corporate audit and governance has generated interesting suggestions from senior company executives who have analysed in detail the recommendations made by the committee. The suggestions relate to income/expenditure of a group company, related party transactions, subcontracting of audit job, definition of independent directors, companies having disproportionately large non-business assets, etc.

The first suggestion is that the auditor's report should specifically mention whether the income/expenditure of the company concerned for the accounting period includes income/expenditure not related to the auditee company. The suggestion has been made because often income/expenditure of another group company are included and since there is no strict provision in this regard in the Companies Act 1956, this route often leaves scope for siphoning of profits. The attendant fallout will be lower tax payment.

The second suggestion is that the auditors should inform the audit committee of the board of a company the estimated financial implications of related party transactions. The argument in support of this suggestion is that related party transactions are often not on arm's length basis. In the fitness of things, the impact of such transactions on the bottomline should be brought to the notice of the audit committee.

According to the analysts, it is unfortunate but true that auditors have been found to have subcontracted their assignment. It is an unhealthy practice, which has to be stopped. After all, the shareholders never authorise auditors to delegate their work.

The third suggestion is that for a listed company which is a subsidiary of another listed company or which is an outfit within the same promoter group, executives/directors of the parent company or belonging to the same promoter group of companies should not be considered as independent directors. This stipulation should be in addition to the committee's recommendations regarding who should be reckoned as independent directors.

The suggestion has been made keeping in view the fact that in our country companies are often controlled through holdings among a number of companies belonging to the same promoter group. Directors are often nominated on the boards of various group companies from the pool of executives/directors of the promoter group.

The fourth suggestion is that the board must approve the annual operating plans before the beginning of the budget year. Further, in the context of Accounting Standard (AS) 28 on impairment of assets, the board must consider and approve the long/medium-term business plans of the company. Also, once a year the management must present to the board details of returns/earnings (for the year and cumulative) from each investment over a certain amount, say, Rs 1 crore. If the return is lower than the prevailing bank rate, the board must record the reasons for it.

In support of this suggestion, the analysts have observed that there are companies that do not place the annual budget before the board until the budget year has begun. This is not a desirable practice. AS 28 requires determination of the value in use of each/cash generating unit and that will be possible only when companies have an established system for preparation of long-term plans and consideration of those plans by the board.

There are also instances of companies which have large amounts blocked in investments the returns on which is not significant. There is one leading FMCG outfit over 80 per cent of whose assets fall in the category of non-business assets (mainly investments), which are not registering significant returns. The fifth suggestion is that the quarterly corporate governance report to stock exchanges should be signed by MD/CEO and not by company secretary, as is the practice now. This, analysts feel, is necessary to inculcate a stronger urge in the top management to abide by the corporate governance norms.

Article E-Mail :: Comment :: Syndication

Stories in this Section
Natco says senior executive stole technology

Copyright © 2003, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line