Corporate Governance

CORPORATE GOVERNANCE

Corporate Governance can generally be understood to be a systematic process by which Companies are directed & controlled to ensure that they are managed in the manner that meets stakeholders’ aspirations & societal expectation. This leads to the corporate governance philosophies of: Trusteeship; Transparency; Empowerment & Accountability; Control and Ethical Corporate Behavior. It is hence a powerful engine for social and economic transformation. It is a system of making management accountable to the shareholders for effective management of the companies, in the interest of the company and also with adequate concern for ethics and values.

Area of knowledge required

A Chartered Accountant to provide services in this area will be required to have comprehensive knowledge of Companies Act, 1956, Security and Exchange Board of India Act 1992, Take over Rule and Regulation, Listing agreement particularly Clause 49 of Listing Agreement, SEBI [DIP] Guidelines, etc.

Role of Chartered Accountant

Some of the key roles that a chartered accountant can play include:

1. Specialized guidance in designing Corporate Governance Framework:
A Chartered Accountant with his knowledge, expertise and experience can guide his client in designing a Corporate Governance Framework. In designing this framework, the following principles should be kept in mind:

The corporate governance framework should promote transparent and efficient markets, be consistent with the rule of law and clearly articulate the division of responsibilities among different supervisory, regulatory and enforcement authorities.
The corporate governance framework should protect and facilitate the exercise of shareholders’ rights.
The corporate governance framework should ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights.
The corporate governance framework should recognize the rights of stakeholders established by law or through mutual agreements and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises.
The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company.
The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and board’s accountability to the company and the shareholders.

Guidance in designing Code of Conduct

Code of Conduct is an integral part of an organization’s Corporate Governance Policy. A C.A can play an important role in designing this Code. This Code of Conduct helps to maintain the standards of business conduct for the Company. The purpose of the Code is to deter wrongdoing and promote ethical conduct. Ethical business conduct is critical to any business. Accordingly, all employees are expected to read and understand the Code, uphold the standards in day to day activities, comply with all applicable laws, rules and regulations and all applicable policies adopted by the Company. The essential ingredients of this Code are:

Compliance with Governmental laws, rules and regulations
Ensuring legal, fair and ethical competition
Maintaining highest possible standards of integrity and ethics
Avoidance of conflicts of interest that may lead to divided personal loyalties.
Deterrence from inducement and bribery
Restriction and reporting of unsolicited gifts and hospitality
Truthfulness and accuracy in communication.
Maintaining Confidentiality of Information
Fulfillment of commitments
Strict adherence to Insider Trading Rules
Protection of Company Assets
Management and mitigation of Risk
Maintaining an Equitable Workplace by ensuring that all individuals are treated fairly and impartially, without prejudice and are given equal employment opportunity
Ensuring safety of individuals by taking safe guard against sexual harassment, and ensuring environmental compliances
Protection and enhancement of human dignity of all those engaged with the company.

3. Specialized guidance in designing Risk Management Framework

All companies are exposed to an extensive variety of risks across their entire range of business operations. In the broadest sense, risk can be defined as the danger of not achieving the financial, operative, or strategic goals as planned. To ensure long-term corporate success, it is therefore essential that risks should be effectively identified and analyzed and then eliminated or at least limited by means of appropriate control measures. A Company should have a comprehensive risk management system in place, which enables it to recognize and analyze risks early on and to take the appropriate action. This system should be implemented as an integral part of the business processes. It must comprises of multiple control mechanisms and must constitute an important element of the corporate decision-making processes. These mechanisms must include recording, monitoring, and controlling internal enterprise processes and business risks, a number of management and controlling systems, a planning process, and a comprehensive risk reporting system. To have an effective Risk Mangement enterprice should have policy:

To monitor implementation of the measures defined to counteract risks
To report on risks to management and the Executive Board on a regular basis
To develop and continuously maintain risk-oriented insurance strategy as a means of risk mitigation
To ensure compliance with regulations governing the establishment and monitoring of effective internal control over financial reporting.
To ensure information security.

4. Specialized guidance in designing Whistle blower policy

The establishment of Whistle Blower Policy is an essential part on Corporate Governance. The company may establish a mechanism for employees to report to the management concerns about unethical behavior, actual or suspected fraud or violation of company’s code of conduct or ethics policy. This mechanism should also provide for adequate safeguards against victimization of the employee reporting under the mechanism. The mechanism should also be appropriately communicated within the organization. A Chartered Accountant can play an important role in making such policy.

Under this mechanism, employees generally have the opportunity to submit or report complaints pertaining to the following areas such as:

fraud which is an act of willful misrepresentation which would affect the interests of the concerned against investors, securities fraud, mail or wire fraud, bank fraud, or fraudulent statements regulatory authorities.
violations of any rules and regulations applicable to the Company and related to accounting and auditing matters
intentional error or fraud in the preparation, review or audit of any financial statement of the Company
any violations to the Company’s ethical business practices as specified in the Company’s Code of Conduct policy
Commission of a crime
Failure to comply with any legal obligation
A miscarriage of justice
A danger to health and safety
Damage to the environment
The deliberate concealment of information tending to show one of the above is occurring or likely to occur
Fraud and financial irregularities
Deliberate improper business conduct
any other event which would affect the interests of the business

5. Internal Audit Charter

Internal Audit Charter is a document that establishes the organization’s positioning and empowerment of internal audit function. The purpose of this charter is to set out the nature, role, responsibility, status and authority of the Internal Audit Department and to outline the scope of their work. The Charter may establish the following as the responsibility of the internal auditor

Identify and assess potential risks to the Company’s operations.\
Review the adequacy of controls established to ensure compliance with policies, plans, procedures, and business objectives.
Assess the reliability and security of financial and management information and the systems and operations (in-house or outsourced) that produce this information.
Assess the means of safeguarding assets.
Review established procedures and systems and propose improvements.
Appraise the use of resources with regard to economy, efficiency and effectiveness.
Contribute to the development of projects, selected according to the risk involved, by confirming that the Bank’s project methodology is followed and that, in particular, adequate controls are incorporated.
Follow up recommendations to make sure that effective remedial action is taken.
Carry out ad hoc appraisals, investigations, or reviews requested by the Management.

6. Other opportunities

Beside assistance in formation of the above-mentioned mechanism and documents of the company a Chartered Accountant can play an important role in following areas:

Internal Audit of Code of Corporate Governance, Risk Management Framework, Internal control framework, Whistle blower policy
Statutory auditor’s Certificate regarding compliance of conditions of corporate governance as stipulated in sub-clause VII(1) of clause 49
Management Audit pertaining to various regulatory, statutory or listing requirements (Item 15 of Annex. 1A of clause 49)
Effective role as chairman of audit committee
Effective role as independent director [clause 49 I(A)(iii) meeting a-f criteria]
Assessment of internal control function under clause 49 V -CEO/CFO Certification
As a consultant giving specialized guidance to the management, regular and speedy updates on all applicable provisions, evaluating future growth potential and in taking proactive actions in the interests of the company

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