Editorial: Seven years after Satyam

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Published: January 11, 2016 12:24:23 AM

Many good regulations, now for enforcement

Seven years after Ramalinga Raju first penned his fraud letter, what lessons have been learned and, more important, acted upon? In this case, fortunately, the answer is many. The main culprits in the Satyam scam were the auditors (who didn’t report what was happening) and the independent directors (who didn’t seem to know what was happening). The Companies Act of 2013 sought to address both these concerns. It redefined the role and tenure of auditors, audit firms, audit committees and independent directors. As a result, there is now compulsory rotation of auditors and audit firms. While an audit firm can be employed for two terms (10 years), the auditor can last only one five-year term. Penalties now will not be just on the auditors but could lead to debarring of the audit firm, too. Along with independent directors, auditors have a duty to report all kind of fraud to the audit committee as well as to the government, depending upon the size of the fraud. While a third of the board now has to constitute independent directors—the audit committee has to have independent directors in the majority—there is a system in place for evaluating the performance of directors. Independent directors have to meet independently of other directors at least once a year and there is a lot more responsibility imposed on them—including, if matters are brought to their notice, legal culpability. Whistleblower provisions have been introduced, related-party transactions have to be voted upon by only minority shareholders—class action suits can also be brought against the promoters and auditors of a company guilty of wrongdoing on various grounds including committing breach of any provision of the company’s memorandum or articles.

As always, the problem is in the enforcement. How well the auditor system has been fixed will be known only when there is a body that audits this regularly and systematically. A National Financial Regulatory Authority (NFRA)was to be set up along the lines of the Public Company Accounting Oversight Board in the US to audit regulator’s work, work on standards and, perhaps, even do random forensic audits on firms—in the few cases forensic audits have been ordered, a lot of fraud has been detected—but NFRA has yet to see light of day. The class action suit part of the Companies Act is yet to be notified, the Serious Frauds Investigation Office has yet to uncover anything substantial and, even in the Raju matter, it is important to note, the case is still at the very first level of the courts and has many stages of appeal to go through. If the process of bringing someone to justice is so long-drawn, even the best of laws aren’t going to be of much help.

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