Bitten by the Satyam fraud,the Securities and Exchange Board of India is finally waking up to a more proactive role in ensuring corporate governance by India Inc. It is set to ask listed companies to compulsorily appoint external auditors to conduct their internal audit besides planning to even ask them to restate profits if a random scrutiny of their books of accounts throws up nasty surprises.
While these two steps are expected in the near-to-medium term,the Sebi board meeting tomorrow is expected to make it mandatory for companies to disclose the percentage of promoter shareholding that is encumbered,or in other words,pledged or hypothecated with some other entity or person. Companies,at present,only give the quantum of promoter holding in their quarterly reports without specifying if they are pledged with any lender or not.
Also,most companies,as on date,have only an in-house team to undertake their internal audit. Satyam Computer Services Ltd,where promoter by B Ramalinga Raju cooked up a Rs 8,000-crore accounting fraud,did not have an external auditor for undertaking its internal audit. Of course,it had a statutory auditor in Pricewaterhouse that relied on management inputs and statements while certifying the internal audit.
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A top Sebi official told The Indian Express that companies listed on the bourses could be forced to appoint external auditors by suitably amending the listing agreement they enter into with the stock exchanges. Further,the capital market regulator is likely to randomly scrutinise the financial statements of companies and even demand a restatement of profits if needed. As a first step to meet this objective,Sebi had last week decided to subject all index (Nifty and Sensex) companies to a peer review of their financial statements by an auditor from a regulator-empanelled list.
External auditors have a lesser probability of getting influenced by top company officials such as the CEO and the CFO. Additionally,they can bring fresh perspective as well as expertise to undertake technology,treasury or supply chain audits. In-house audit teams have limited career growth prospects within the company and also face constraints in investing for acquiring new skills and techniques.
In its board meeting tomorrow,Sebi will also make it compulsory for promoters to disclose their shareholding if part of it is pledged or hypothecated. An official said that in their quarterly statements,companies would be required to disclose the percentage of shares encumbered within the overall promoter holding. This will give a clear idea of the effective control a promoter has in a company, the official said. In Satyams case,almost half of Rajus shareholding was pledged with a clutch of lenders.
Sunil Chandiramani,National Director,Advisory Services,Ernst & Young,said even among the top 500 companies in India,less than 50 per cent,had appointed an external auditor to undertake the internal audit. While it is true that the audit committee chair decides the remuneration of the internal audit head,it is an exception than a norm, he said. The audit committee itself comprises only independent directors in the board of a company.
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