Prof. D. Mukhopadhyay
Evolutionary development of modern corporation is based on the premise of separation between ownership and control. Owners delegate a significant part of their authorities to management within the corporation (Solomon Vs Solomon & Company Ltd. 1896). Berley and Means advocated embedded voting rights for all the shareholders, greater transparency and accountability way back in 1932. A corporation form of business entity is legally independent of the members. A company or corporation may, inter alia, incur and pay any debt, negotiate contracts, own property , sue and can be sued. The separation of ownership from control reinforces the need for a number of control mechanism in order to ensure efficient decision-making and maximizing the value of the wealth of the concerned company. Traditionally, these mechanisms are included in the structure of governance of the companies in terms of Internal check and internal control, internal audit and statutory audit in order to ensure the shareholders on efficient functioning of internal control system, authenticity, validity and reliability of financial information provided by management, shareholders can rely on independent auditors. The auditors’ role is quite significant in contributing to reducing the information asymmetry between the shareholders in the shoes of the principal and management in the role of the agent as the former cannot verify the action of the agent. The recent financial crises provide evidence of significant ‘expectation gap’ between various groups of stakeholders and management, leading to a lack of public confidence in the usefulness and the quality of financial reporting and efficiency of control system within corporations. The major criticisms concern widespread corporate management abuse, lack of efficient internal control system, absence of adequate independence, integrity and objectivity among external auditors, insufficient oversight exercised by regulatory authorities and ineffective corporate governance structure. As a consequence, the owners , investors, exchequers and the society at large are observed to have been in the state of being bewildered under the prevalent circumstances of financial scams, scandals , irregularity and misappropriation of assets of the companies which is the order of the day. Happening of financial scams and corporate frauds are not a new phenomenon but dates back the time of the East India Company(EIC) which was a Crown chartered trading company. It was owned privately but had a mandate to benefit the British State commercially and politically as well. First and foremost, the EIC was an agent of the Crown. It was first Multinational Corporation in the world that pursued investment opportunities as well as territorial political power. The EIC employees based in India sought commercial profits for themselves, the Crown, and the East India House and eventually they acquired Indian Territory aggressively on behalf of the Empire. In late 1700s Edmund Burke had Robert Clive, the founder of the empire, and Warren Hastings, India’s Governor General, brought up on impeachment charges laden with corruption issues although it failed to convict anybody. It was observed that corporate conduct of the EIC was inconsistent though many a time it used to comply with ethical practices in safety and financial matters but many a time , it was found to be engaged in economic theft and bribes, breach of civil liberties and violations of human rights. The company was subsequently wound up under the East India Company Stock Redemption Act. The South Sea Bubble of 1720s even much before the EIC, Sub-Prime Lending Financial Crisis of 2007-2008 in the USA in recent past caught the attention of the fiance experts and researchers. In post colonial ruled India, Haridas Mundhra Scam is worth mentioning. Haridas Mundhra, an industrialist and stock speculator sold fictitious shares to Life Insurance Corporation of India (LICI) and thereby defrauding LICI by Rs.125 crores. The Government of India set up a one-man commission headed by Justice Mahommed Ali Currim Chagla(30-9-1900-9-2-1981) to Investigate. Justice Chagla found Haridas Mundra guilty and was he was sentenced to imprisonment of 22 years and T.T. Krishnamachari, the then Finance Minister resigned from his position.
Our country has regulators such as SEBI, RBI and Ministry of Companies Affairs(MCA) for monitoring the stock exchanges but none documented the whereabouts of these 2,750 odd evaporated companies. Certain anti-fraud legislation for curbing corporate frauds are in place. Recently reported banks frauds to the tune of Rs 34,097Crore that took place during April-December 2021, just in nine months of a financial year and it badly eclipsed the financial health of 27 scheduled commercial banks and financial institutions having been reported 96 cases of frauds. Similarly, Kingfisher Airlines, Jet Airways, Bhusan Steel, IFLS, DFL, are worth mentioning financial scandals. Lack of effective corporate governance is responsible by and large for such financial scams and scandals. The relevance of accountability, management control system, financial reporting, auditing, and governance are interrelated and interdependence variables. Efficiency of corporate governance depends to a great extent on effectiveness of internal control and internal auditing systems, transparent disclosure of company’s financial and business activities and the mechanism of accountability and stewardship functioning. Proper implementation of corporate governance codes and practices should ensure that the managers are accountable to all the stakeholders including investors assuming multifaceted business risk. Greiling and Spraul (2010) highlighted importance of information disclosure in accountability arrangement.
The National Commission on Fraudulent Financial Reporting, an initiative sponsored by the American Accounting Association (AAA), the American Institute of Certified Public Accountants (AICPA), Financial Executives International (FEI), The Institute of Internal Auditors (IIA), and the Institute of Management Accountants, (IMA), formerly the National Association of Accountants(NAA), studied the causal factors that lead to fraudulent financial reporting and were concerning to identify measures and provide recommendations to help reducing the incidence of fraudulent financial reporting in the USA. It organized the Committee of Sponsoring Organizations (COSO) in 1985 in order to develop internal control frameworks providing criteria for evaluation of internal control systems. The first document was released in 1992, Internal Control-Integrated Framework, known as COSO1. It attributes the responsibility for internal control to the board of directors, directors and employees that should assure efficacy and efficiency on operations, accountability on financial reports and compliance to legal rules and regulations. This development fits so well to the aspiration of regulators that AICPA substituted the internal control definition in SAS 55 by the COSO1 when issued SAS 78. From then on, COSO 1 turned to be a reference to independent auditors in their evaluation of internal controls and in their opinion issuing. In1996, COSO published another document, the Internal Control Issues in Derivatives Usage, as this type of financial instrumental was new and complex as well. The Information System Audit and Control Association (ISACA), a non-profit seeking organization of 140.000 professionals in 187 countries was established in 1969 with the purpose to set guidance in the growing field of auditing controls for computer systems. In 1994, it released the Control Objectives for Information and Related Technology (COBIT), a framework for the governance and management of firm’s IT.
Recently, Indian Parliament has enacted the Chartered Accountants(Amendment) Act, the Cost & Works Accountants (Amendment) Act and the Company Secretaries (Amendment) Act, 2022( 12 of 2022) based on the respective Bill placed in the Parliament in 17th December, 2021 and recommendations of the Parliamentary Standing Committee on Finance chaired by Jayant Sinha , Member of Parliament. The 45th Standing Committee on Finance Report categorically recommended inter alia, for setting up another Statutory Body of Accounting Education and Research , ‘Indian Institute of Accounting'(IIA) and the change of the name of the Institute of Cost Accountants of India as the Institute of Cost and Management Accountants of India (ICMAI) or any other suitable name keeping in view the international practices and benchmark. The reason for setting up another national level of Institute of Accounting given by the Parliamentary Committee is to curb the ‘statutory monopoly’ of the Institute of Chartered Accountants of India in the domain of accounting and audit and enhancing the degree of competition in this area and hence quality of the professional services. Name change of the Institute of Cost Accountants of India is a long pending issue and the demand of the Institute of Cost Accountants of India (formerly ICWAI) and this kind of nomenclature of a Body of Professional Management Accountants exists no where for last 50 years or more in the world including Bangladesh and Sri Lanka except India. Nirmala Sitaraman, Finance and Corporate Affairs Minister, gave her justification, while replying to the questions being the part of the Parliamentary debate, for amendment of the existing Acts of three giant Professional Bodies of Accountants and Governance Professionals (the CA Act 1949, the CWA Act 1959 and the CS Act 1980) that the international best practices viz UK, USA, Canada, Australia, South Africa etc were studied by the Government and the practices of these countries are adopted as benchmark while amendment in the existing Acts regulating these three Professions was slated in the Parliament. The Parliamentary Standing Committee on Finance referred the same best international practices in its 45th Report while recommending setting up of the IIA and changing the name of the Institute of Cost Accountants of India to the Institute of Cost and Management Accountants of India or any other suitable name keeping in view the international practices and benchmarks. It is worth mentioning that both the recommendations are ignored and the said Bill has been passed by both the Houses of the Parliament and the same has also received the assent of the President of India on 18th April, 2022.
Competition is the common denominator for enhancing quality of services by which the consumers and users of the professional services and expertise are the ultimate beneficiaries. Over and above all, it is not reasoned to understand what international best practices and benchmark our government thinks of and refers to throughout the length and breadth of the Parliamentary debate on the said Bill while recommendations of the Parliamentary Standing Committee on Finance for setting up another National level Institute of Accounting and the change in the name of the Institute of Cost Accountants of India are set aside even though there are six Professional Bodies in the UK, 4 in Australia, few in the USA, Hong Kong, Canada South Africa and so on. Best corporate governance is sine qua non for controlling and preventing financial scams and scandals and the Institute of Chartered Accountants of India , the Institute of Cost Accountants of India and the Institute of Company Secretaries India are three vital and pivotal pillars of good corporate governance and therefore the members of these three Sister Institutes must ensure that they discharge their professional duties and responsibilities on the basis of the cardinal principles of sound professional code of conduct, ethical practices, due diligence, objectivity and non-negotiable professional integrity. The new legislation enacted by the learned lawmakers is expected to make the Indian corporate governance system more robust and the nation shall immensely be benefited by the same. To conclude, India should legislate laws proactively and not based on reactive response since another series financial scams and scandals generally get ready to take place even before the new law is implemented in letter and spirit.
(The author is an Independent Researcher and Practising Educationist)
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