Corporate governance for a healthy future.

[ajay singh]

Corporate governance for a healthy future :-

Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation (or company) is directed, administered or controlled. An important theme of corporate governance is the nature and extent of accountability of particular individuals in the organization, and mechanisms that try to reduce or eliminate the principal-agent problem

A related but separate thread of discussions focuses on the impact of a corporate governance system on economic efficiency, with a strong emphasis on shareholders' welfare; this aspect is particularly present in contemporary public debates and developments in regulatory policy.

The Ministry of Corporate Affairs (MCA) at the Centre in its recent notifications relating to the maintenance of cost accounting records and related reporting has done a significant step towards improving the quality of governance.

The Cost Accounting Record Rules and Report Rules were introduced in the backdrop of the misuse of national resources and the intimidation of market forces in the 1970s and 1980s, leading to several enquiry commissions. But the impact of these rules was not publicised by the policy makers at that time as they were used mainly as interventionist policies. Even at that time, Parliament had envisaged it as a scheme for monitoring resource utilisation by the corporate sector. Since the framework was very incisive, bringing more transparency in operational areas, it was never welcomed by the business world of yesteryears.

MCA formed an Expert Group (EG) in 2008 to study and suggest suitable changes to cost accounting/audit to a framework that would facilitate the competitive regime and also protect the stakeholders wherever relevant. EG consisted of nominees from FICCI, CII, Assocham, the IIMs, academia, ICWAI , ICAI , ICSI and other stakeholders. The EG submitted its report in 2009, with the sole dissenting note from ICAI. The current notifications are a result of the consensus reached on the EG deliberations hosted countrywide.

The notifications issued by the MCA on Cost Accounting Record Rules and Report Rules were premised on the following conclusions of the EG:

•Some business sectors concerning the common man will continue to be under administrative price control and the concerned regulators will need reliable cost information.

•Financial statements and their annexure alone cannot present insights into business performance internally. This is validated by various reports of the International Federation of Accountants (IFAC) and the evolution of business reporting projects.

•Good governance has another side to it called Performance Governance (IFAC document on Governance published in 2008). For performance governance, entities charged with governance, such as the board of directors (BOD), should ensure the existence of internal performance management systems. ERM systems is one such requirement ensured through Clause 49 of the Listing Agreement. ERMs are internal systems but yet have an impact on the investor community. Environment systems are now emerging in the same way through an emphasis on ESG.

•Not all companies in corporate India present a high level of maturity in cost management. An enabling mechanism could nudge the corporate sector towards good management practices (Such a statement was enshrined even earlier in the Onkar Goswami report on Company Law.) to induce confidence in investors.

•Highly cost competitive companies whose cost accounting systems are at a best practice level would, in any case, be beyond the basic costing systems (supporting good governance) and, hence, should not be impacted by any reforms in the Cost Accounting Record Rules and Report Rules.

The notifications that have been issued by the MCA are in line with the above thought processes.

The salient features of the notification, if understood properly, will make amply clear the lofty ideals behind the same:-

•Product-specific costing record rules now apply to just eight industries from 44 earlier. The regulatory bodies of these eight industries — including power, telecoms, bulk drugs, formulations, fertilizers — that are under the price control regime today, would need externally attested cost information.

•The remaining 36 industries have been brought under a single general cost accounting rule that is not prescriptive but only says that the cost accounting information should be available to the minimum standard prescribed by ICWAI through its cost accounting standard board (CASB). It may be noted here that CASB has nominations from CII, FICCI and Assocham, among others.

•The scope of application of these 36 has been further expanded to inculcate a cost accounting discipline for improved governance in many other sectors.

•The minimum standard on cost accounting by ICWAI will not accept financial accounting information maintained as per accounting standards as cost information. They will expect resource utilisation discipline for performance assurance under an enhanced governance framework at the entity level.

•Other than the eight core industries and another set of eight industries of national priority, including cement and steel, the remaining companies need not undergo any cost audit by an external cost accountant. Instead, even a cost accountant who is an employee, can file a compliance report to the board of directors that the notifications are being complied with.

•As a result of the above notifications, a well-managed company with a good existing cost accounting system will benchmark itself with the minimum standards required on cost accounting. If an entity has such a robust system, there will not be any need for maintaining any extra records and will be compliant with the rules.

•Further, in the 16 industries that will be subjected to cost audit, the board (and not the MCA) will receive a performance management appraisal report about various aspects of cost competitiveness and resource utilisation, including the impact of IFRS vis-a-vis the historical cost structure.