Corporate scams and the companies bill, 2009 Malhotra IS1, Dr., Professor 1Gitarattan International Business School, Rohini, Delhi |
Satyam A Corporate Fraud On The Stakeholders Satyam’s episode started on Dec. 16, 2008 with the negative reaction of shareholders towards the proposed acquisition of Maytas Infrastructure hitting the news headlines. It reached its climax on Jan 7, 2009, with Mr. Raju’s confession that Satyam’s accounts had been falsified. What started as a marginal gap between actual operating profit and the one reflected in the bqoks of accounts continued to grow over the years. It attained unmanageable proportions as the size of company operations grew significantly with annualized revenue run rate of Rs 11,276 crore in the September quarter of 2008 and official reserves of Rs 8,392 crore. As the promoters held a small percentage of equity, the concern was that poor performance would result in a takeover, thereby exposing the gap. The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with the real ones. |
Top Accounting Failure Satyam has been the largest financial fraud to have occurred in India, which eroded nearly $2 billion of wealth that belonged to 3 lac shareholders and their net worth dropped from a positive Rs 8,529 crore to a negative Rs 278 crore. This fraud was not committed overnight, but it was building up continuously over the years. Satyam had engaged PwC as it’s auditors over the past decade who ignored some of the obvious indications of embezzlement as given below and thus failed to unearth a massive scam, which could have been caught by a novice much before it acquired such massive dimensions - |
The holdings of Mr. Raju and his family decreased from 15.67% in 2005-06 to 8.61% in September 2008 and further dipped to a meager 2.3% by 2009. Satyam closed 2007-08 with $56 million of debt, even after having about $1.2 billion of cash. Further, an enormous amount of Rs.4462 crore was lying unused in its current account. Satyam’s fixed deposits grew from Rs. 3.35 crore in 1998-99 to a massive Rs. 3320.19 crore in 2007-08 which were mainly fake. The auditors were supposed to have an independent bank confirmation of such deposits.
Top Statutory Duties Of An Auditor: A Great Pitfall The auditor’s function is not just to verify the arithmetical accuracy of the accounts but it includes all the particulars required by law to present a correct and fair view of the company’s financial standing. Under the Companies Act, 1956, an auditor is required to express an opinion as to whether the annual accounts provide a true and fair view of the company’s state of affairs and financial position. To formulate such an opinion, the auditor need to examine the company’s internal accounting system, inspect its assets and test- check the accounting transactions. |
The main problem with the existing system of audits is that auditors are both engaged and paid by the same managers who may be responsible for misreporting. Auditors have incentives to comply with these managers in order to protect their fees. Further the penalties for negligent or fraudulent audits are not significant. Notwithstanding these potential costs of conducting independent audits, it is evident that many times audit firms and individual auditors turn a blind eye to blatantly fraudulent reporting on the part of their clients. |
Top Corporate Governance Vis A Vis The Salient Features Of The Companies Bill, 2009 Considering the urgent need to institute measures to prevent such fraudulent practices by the companies and restore confidence of various stakeholders in investing their funds in the companies, the Government brought forward Companies Bill 2009 in Lok Sabha on 3rd August 2009. The main objectives of the Companies Bill, 2009 are as follows |
To revise and modify the Companies Act, 1956 in consonance with the changes in the national and international economy. To incorporate the principles and provisions of corporate governance. To bring about compactness by deleting the provisions that had become redundant over time and by regrouping the scattered provisions relating to specific subjects. To delink the procedural aspects from the substantive law and provide greater flexibility in rule making to enable adaptation to the changing economic and corporate environment.
Top The Companies Bill, 2009, interalia, provides for:- The basic principles for all aspects of internal governance of corporate entities and a framework for tlpeir regulation, irrespective of their area of operation, from incorporation to liquidation and winding up, in a single, comprehensive, legal framework. Articulation of shareholders democracy with protection of the rights of minority stakeholders, responsible self-regulation with disclosures and accountability, substitution of government control over internal corporate processes and decisions through shareholders control. Application for the successful e-Govemance initiative of the Ministry of Corporate Affairs to all the processes involved in meeting compliance obligations. The proposed e- Govemance regime is intended to provide for ease of operation for filing and access to corporate data over the internet to all stakeholders, on round the clock basis. Speedy incorporation process, with detailed declarations/disclosures about the promoters, directors etc. at the time of incorporation itself. Every company director would be required to acquire a unique Directors Identification Number (DIN). Duties and liabilities of the directors and for every company to have al least one director resident in India. The Bill also provides for independent directors (minimum 33% of the total number of directors) to be appointed on the Boards of such companies. Statutory recognition to audit, remuneration and stakeholders grievances committees of the Board and recognizes the Chief Executive Officer (CEO), the Chief Financial Officer (CFO) and the Company Secretary as Key Managerial Personal (KMP). Recognition of both accounting and auditing standards. The role, rights and duties of the auditors defined as to maintain integrity and independence of the audit process. A separate framework for enabling fair valuations in companies for various purposes. Appointment of valuers is proposed to be made by audit committees. Shareholders Associations/Group of Shareholders to be enabled to take legal action in case of any fraudulent action on the part of company and to take part in investor protection activities. A revised framework for regulation of insolvency, including rehabilitation, winding up and liquidation of companies with the process to be completed in a time bound manner which incorporates international best practices based on the models suggested by the United Nations Commission on International Trade Law (UNCITRAL). A more effective regime for inspections and investigations of companies while laying down the maximum as well as minimum quantum of penalty for each offence with suitable deterrence for repeat offences. Levy of additional fee in a non-discretionary manner for procedural offences, such as late filing of statutory documents, to be enabled through rules.
The Companies Bill, 2009, on its enactment, would allow the country to have a modem legislation for growth and regulation of corporate sector in India taking into account the fundamentals of corporate governance. In view of various reformatory and contemporary provisions proposed in the Companies Bill, 2009 together with omission of existing unwanted and obsolete compliance requirements, the companies in the country would be able to comply with the requirements of the proposed Companies Act in a better and more effective manner which would help in minimizing the possibility of corporate scams to occur at such a massive level as that of SATYAM. |
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