Role of Chartered Accountants in Corporate Governance

[Dr. Sanjiv Agarwal]

Corporate governance and Chartered Accountants are inseparable and one can not expect to practice the good practices without involvement of a finance professional. The paper makes an attempt to understand the concept of corporate governance and role of Chartered Accountants and auditors in practicing good corporate governance. Both in India and abroad, a significant work has been done in this area and the core recommendations of various codes and committees relating to this aspect of governance find place.

Role of Chartered Accountants:

Although the role of Chartered Accountants in corporate governance is generally understood in the capacity as an auditor, according to me, Chartered Accountant can play a significant role in practicing good corporate governance, as compared to an ordinary person in his different capacities like -

(i)   as shareholder or stakeholder of a company

(ii)  as an employee or part of management team of the company

(iii) as a member of the board of directors or any of its sub-committees

(iv) as a promoter

(v)  as a auditor - internal or external

He can play a crucial role of a crusader in achieving corporate governance in these different capacities. Every where in the world and especially in developing countries, people are looking at corporate governance more seriously, and the Chartered Accountants have to play an important role in the whole process of governance by helping to balance business practices and objectives of the board whose primary concern should be to sun a company in a profitable manner and at the same time as good law abiding entities. As a corporate guardian, it is the Chartered Accountants who will have to ensure achieving corporate governance.

Role of Auditors:

Auditors role in the achievement of corporate governance should be such which facilitates efficient operations through -

i)     audit of agency costs inherent in a division between the provision of capital and the stewardship of the undertaking such capital is invested in;

ii)    seeking to ensure a proper standard of performance and accountability for the benefit of all stakeholders.

It would also be obligatory for the auditors to understand the importance of transparency and public accountability of the company as a means of ensuring that the stakeholders could hold him also account for the external impact of non-disclosures in the statements or non-transparent statements. This principle of disclosure is of fundamental nature, which arises out of freedom to choose and disclose.

Transparency can reinforce sound corporate governance. Transparency should lead to the efficient operation of market forces and the exercise of beneficial economic choices without the need for a legal or regulatory intervention with its distorting and costly effects.

The system of accounting and reporting is an integrated one. It follows that company's accounting and reporting should satisfy a wide range of needs including those of  -

1.      shareholders in exercising governance functions (Voice)

2.      Creditors who need to have a clear picture of the position and prospects of their debtors (Liquidity)

3.      Investors, both actual and potential, who wish to know whether to acquire, retain or sell, a stake in business (Exit and entry)

4.      Other stakeholders (including employees and the public) having variety of relationship with the business (Accountability).

The role of the auditors would be to -

1. Audit the historic financial information in annual report
2. Review for consistency the surroundings to the annual accounts
3. Reach a view whether a statements have been 'properly prepared' and are forward looking statements (not necessarily forecasts) and policies.

The auditors have a duty of care to existing shareholders of the company and  also to any other person and purpose to whom and for which they have or are deemed to have expressly or implicitly agreed to owe such duty. This is desirable when we talk of corporate governance.

Disclosure & Transparency

OECD principles of corporate governance state one of the principles on disclosure and transparency . It states that "  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.

A.    disclosure should include but not be limited to, material information on :

·         The financial and operating results of the company.

·         Company objectives

·         Major share ownership and voting rights.

·         Members of the board key executives , and their remuneration.

·         Material foreseeable risk factors.

·         Material issues regarding employees and other stakeholders.

·         Governance structures and policies.

B.     Information should be prepared , audited and disclosure and disclosed in accordance with high quality standards of accounting, financial and non-financial, and audit.

C.     An annual audit should be conducted by independent auditor in order to provide an external and objective assurance on the way in which  financial statements have been prepared and presented.

D.    Channel of disseminating information should provide for fair, timely and cost efficient  access to relevant information by users.

A strong disclosure is control to shareholder's ability to exercise their voting rights. Disclosure also helps improve public understanding of the structure and activities of enterprises, corporate policies and performance with respect to relationship with the committees in which they operate.

Disclosure requirements are not expected to place unreasonable administrative or cost burdens on enterprises. Nor are companies expected to disclose information that may endanger their competitive position unless disclosure is necessary to fully inform the investment decision and to avoid misleading the investor. In order to determine what information should be disclosed at a minimum, many countries apply the concept of materiality. Material information can be defined as information whose omission or mis-statement could influence the economic decisions taken by users of information.

The principles support timely disclosure of all material developments that arise between regular reports, They also support simultaneous reporting of information to all shareholders in order to ensure their equitable treatment.

The application of high quality standards is expected to improve the ability of investors to monitor the company by providing increased reliability and comparability of reporting and improved insight into company performance. The quality of information would depend on the standards under which it is complied and disclosed.

Responsibility and Accountability

Responsibility and accountability go together. Corporate managements are today accountable not to themselves (in terms of monetary measurement of performance), not to the promoters (in terms of reward on returns) and not to shareholder (in terms of dividend yields) alone. Corporate governance has shifted the focus to a broader beneficiary category known as stakeholders which also includes employees and ex-employees, vendors, business partners, customers, clients, regulators, society etc.

A sincere discharge of true accountability towards stakeholders would lead to achieve corporate wealth maximization, investors confidence, corporate image building and enhanced market-capitalisation. This can be achieved with clear and transparent management system and integral philosophy of maximizing wealth. Wider participation of stakeholder hold the key. That is were corporate democracy comes into play.

Suggestions

1.      It is suggested that for listed companies, the statement of results should become a statutory document distributed to all shareholders and published on a company website. To achieve this, it becomes necessary that each such company has a web site. Such result should also been available to shareholders, researchers and others interested on request.

2.      Listed companies should include in their full annual report a new statutory operating and financial review (OFR) which should enable the user to access the performance and prospects of the business including its wider relationships, its reputation and its impact on the community and the environment. The contents of the review would have to be partly described by the statute with detailed requirements laid down in standards. This report may be a supplement to director's report. Responsibility for content of the OFR lies with the directors. Their judgment on relevance and fairness cannot be second-guessed by the auditors. Mandatory auditor review is  suggested to  be restricted to:

·         Reviewing the statements in the OFR for consistency as against the company's financial and other records;

·         Reviewing the factual basis of claims made - e.g. is there evidence to support the assertion of achievement of a particular quality standard?

·         Reviewing compliance with any applicable reporting standard developed by the standard setting body. The auditors may need to be permitted to delegate this function to an expert in appropriate cases;

·         Checking that none of the information in the OFR is inconsistent with their knowledge of the company acquired in the course of their audit.

3.      The auditor's review report will need to state whether the new OFR has been properly prepared in accordance with the statute and any applicable mandatory rules, but subject to the margin of judgment reserved to directors. On the other hand I regard it as important that audit should not trespass on the area which should be left for directors' judgment. None of this would, of course, prevent directors consulting the auditors and considering their advice and experience on wider questions, if they chose so to do.

4.      The role of the auditor should be extended and enhanced for which scope of audit and the range of auditors' liability should be widened.

5.      Company law must encourage, not suppress the flexibility. When intervention is necessary it should be designed, so far as possible, to avoid inhibiting freedom of choice and flexibility for development.

6.      Reporting should involve use of information and communication technology. Where information is required to be sent, distributed, published or maintained in written form under the Act, this should be permitted to be done in electronic form and by electronic means. Provisions for allowing the filing of certain company information at Registrar of Companies office needs to be brought in encouraged and developed.

Conclusion

To conclude, it can be said that we, as auditors need to serve the entrepreneurs, captains of industry and corporates as change agents and help in wealth creation and achieving corporates excellence. The message is loud and clear. We can not ill afford to be silent, overlooking and laid back. Doing nothing is not an option. Martin Luther King Jr. observed, "We shall have to repent in this generation not so much for the evil deeds of the wicked people but for the appalling silence of good people". He expressed the hope that India's resilient corporate structure would rise up to the occasion and set highest standards of efficiency, productivity, innovation and best business practices.

Milton Friendman's famous formulation "The business of business is business" has outlived its utility and relevance, and societal responsibilities of the corporates have become the buzzword in the international business arena. It is being increasingly recognized that being a responsible corporate citizen is important in ensuring long term success of a company. India's corporate sector has a new tryst with destiny. To face the formidable challenges of the new millennium, the corporate sector has to be empowered with a new vision, dynamic mission and new mandate to follow best practices of governance.

 

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