Audit panels once again under scrutiny

NEW DELHI: The government is taking a close look at audit committees once again. This follows not only contrary, even if not contradictory, lobbying by CII and Ficci on the subject but also fresh revelations about how audit committees have malperformed in some of the best regulated markets abroad.
Stories of Phil Gramm, the Republican on the US Senate Banking Committee, and his wife Wendy, who held a berth on Enron’s board and audit committee have rocked Washington in recent months.
Sen Gramm is supposed to have collected almost $100,000 in campaign contributions from Enron over the past 12 years, the second-biggest draw in US Congress. Wendy Gramm, as the chairperson of the Commodity Futures Trading Commission is supposed to have pushed through a key regulatory exemption that benefited Enron, just five weeks before joining the company’s board in 1993.
She is also supposed to have collected between $915,000 and $1.85 million from Enron in salary, attendance fees, stock options and dividends between 1993 and 2001, according to Public Citizen, a Washington watchdog group, whose view has been widely reported by the US media.
In subsequent interviews, Sen Gramm has defended the couple’s position by stating that they had no warning of the company''s bankruptcy or its dire financial situation. Also, his wife did not do anything wrong from her vantage point on Enron''s board and audit committee, which is supposed to keep a close watch on the company''s financial practices.
Notwithstanding such stories of the complexities of those on the audit committees, the Indian authorities are planning to go ahead with measures to strengthen the audit committees.
In keeping with this resolve, a hike in the sitting fees payable to nominee directors seems to be on the anvil. The present permissible level is Rs 5,000 per meeting. This can be expected to at least double in the coming months. For professionals, this could mean more in earnings.
For corporate India, this could mean more in the wage bill. Though the idea has come from industry itself — CII is spearheading it — Ficci is currently lobbying that the hike in sitting fees should be within the overall ceiling of managerial remuneration prescribed under Schedule XIII of the Companies Act, 1956. Under this schedule, companies cannot pay more than 11 per cent of their profits in managerial remuneration, or salaries/fees to its directors
“It would be wrong to force unnecessary burden on companies in a slowdown year.� Ficci’s fears are clear to see. It is afraid that the Institute of Chartered Secretaries of India (ICSI), which is currently formulating the guidelines on behalf of the DCA, may well be tempted to recommend a multi-fold hike in sitting fees, considering the direct beneficiaries of this move would be professionals.
Simultaneously, the DCA could well exempt private companies from mandatorily setting up audit committees, even while making the findings of the audit committee binding on the boards of all companies with a paid-up capital exceeding Rs 5 crore.
However, by doing the latter, the department may be chewing far more than what it can swallow. By definition, audit committees are subcommittees constituted by the board. Making its findings binding on the board could well amount to overriding the supremacy of the board and making it redundant.
Industry is arguing that what the department could well do is provide in law that the board should record the reasons why the findings of the audit committee have been rejected. This recording could be in the minutes of the board meeting, or the records of the company, “since these are internal matters.�
The professionals, however, have been pointing out that their ability to function effectively on the board is being compromised, considering that promoter-directors rarely listen to their suggestions. What they are also not saying is that their ability to function would naturally be compromised, since they are paid by the company — questioning is not easy when the person to be questioned is your paymaster.
DCA’s certainly caught on a tricky wicket here. It would ideally like the professionals on the board of a company to be its conscience-keeper. But the very employer-employee relationship between the part-time and full-time directors on the board makes arms length relationship impossible.
“This is the international structure,� states a senior DCA official. “Over-regulation and knee-jerk reaction is unwarranted. Adoption of corporate governance and international best practices have to be voluntary,� counters industry.
In case of private companies, the issue, which is emerging is that such companies do not require the level of transparency as do public listed companies, where the public monies are involved.
Company law itself is neutral on the issue. Recent amendments to it make it mandatory for companies with a Rs 5 crore capital to set up audit committees, without distinguishing between closely-held and public limited companies. Industry is raising the issue that there could be privately held companies
with a Rs 5 crore equity.
Such committees may actually have only three directors, each positioned at the opposite end of the globe. Such companies would have to induct more members to the board to fulfil the mandatory audit committee requirements, unnecessarily adding to their cost, when they really do not that level of disclosure and regulation. DCA officials confirmed that they were examining all these issues but the government was yet to firm up its views.