The committee has also recommended rationalisation of penalties, setting up of a Corporate Serious Fraud Office, establishment of Quality Review Boards (QRBs) and overhaul of disciplinary procedures for punishing errant chartered accountants, company secretaries and cost accountants.
The committee, said Mr Chandra soon after presenting the report to finance and company affairs minister Jaswant Singh on Monday, did not recommend audit firm rotation. Although the Comptroller and Auditor General of India (CAG) and Assocham representatives, during committee meetings, made a case for audit firm rotation, Mr Chandra said their suggestion was not accepted because of practical difficulties involved in changing auditors. Another member of the committee, Dr Omkar Goswami added, The international practice was to change auditing partners and not auditing firms.
The committee, said Mr Chandra, has also suggested compulsory audit- partner rotation. The auditors, he said, Should be given the right to address shareholders and they work on their behalf and not on behalf of the management.
The committee, which has defined the term independent directors, has suggested that audit committees should consist entirely of independent directors. According to the report, an independent director is one who, apart from receiving directors remuneration, does not have any material pecuniary relationship with the company, its promoters, its senior management or its holding company, its subsidiaries and associated companies. It further suggested that non-executive directors should be exempted from various civil and criminal liabilities in the Companies Act and other statutes like Negotiable Instruments Act.
For making the board of listed companies more responsible, the committee suggested that not less than 50 per cent of the board of directors of a company should be independent directors. The nominee directors of financial institutions, it said, should be not be counted either as independent or as functional directors. According to the recommendation, the board should consist of a minimum of seven directors of which at least four should be independent directors.
The committee has also recommended setting up of a Corporate Serious Fraud Office in the department of company affairs (DCA) to deal with frauds of high magnitude involving violations of multiple regulatory guidelines. Mr Chandra added, The office should should be in the form of a multi-disciplinary team to not only uncover the fraud but also to direct and supervise prosecutions under various economic legislations through appropriate agencies.
Referring to the recommendation of making it mandatory for CEOs and CFOs to certify correctness of annual audit accounts, Mr Chandra said the norm should be made applicable to all listed and public limited companies whose capital and free reserves exceed Rs 10 crore or turnovers exceed Rs 50 crore. The CEOs and CFOs will have to give an undertaking that the statements of accounts, Do not contain any material untrue statement or omit any material fact nor do they contain statements that might be misleading.
Although the committee studied the Sarbanes-Oxely Act on auditing, it refrained from suggesting setting up of a Public Accounting Oversight Board (PAOB). However, it recommended setting up of independent QRBs, one each for Institute of Chartered Accountants for India (ICAI), Institute of Company Secretaries of India (ICSI) and Institute of Cost and Works Accountants of India (ICWAI).
Mr Chandra said these QRBs would consist of persons of eminence, apart from council nominees. It shall periodically examine and review the quality of audit, secretarial and cost accounting firms and comment on the quality and sufficiency of systems.