Model Question and Answers for APSC | In the light of the Satyam Scandal (2009), discuss the changes brought in corporate governance to ensure transparency, accountability.
In the light of the Satyam Scandal (2009), discuss the changes brought in corporate governance to ensure transparency, accountability.
Ans: Corporate governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies. The shareholders' role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place.
The Satyam Scam in 2009, sent shock waves through India Inc and in its wake altered the corporate governance landscape in India permanently. On January 7, 2009, the Chairman of Satyam Software Services Ltd, Ramalinga Raju, confessed to a Rs 7,136 crore fraud committed by him and a few others at the company. The scam highlighted several loopholes in the Indian corporate governance structure - unethical conduct, fraudulent accounting, insider trading, oversight by auditors, ineffectiveness of Board, failure of independent directors and non-disclosure of material facts to the stakeholders.
Changes brought in corporate governance to ensure transparency, accountability:
- In 2009, the Confederation of Indian Industries set up a task force headed by former cabinet secretary Naresh Chandra to suggest reforms.
- Based on the recommendations of this task force, the Ministry of Corporate affairs issued Voluntary Guidelines for Corporate Governance in 2009.
- In April 2014, SEBI amended the Listing Agreement to include provisions relating to establishment of a vigil mechanism, role of Audit Committee in cases of suspected fraud or irregularity, and the role of the Chief Executive Officer and the Chief Financial Officer pertaining to financial reporting and disclosure to the Audit Committee.
- In 2015, SEBI framed the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR”), applicable to all listed companies, and provided for stringent guidelines relating to reporting / disclosure of material events and actual and suspected fraud.
Companies Act, 2013:
- The Companies Act 1956 came to be repealed with the new Companies Act 2013 (Act).
- The Act provides for corporate fraud as a criminal offence. It sets out clear obligations for reporting of instances of fraud on auditors, cost accountants and company secretaries.
- It clearly outlines the responsibility and accountability of auditors and independent directors, who are expected to play a more active role.
- The checks and balances introduced to ensure proper governance and management in the company require the hitherto passive actors to play a vital role, in the interest of the shareholders, creditors, vendors, customers and other stakeholders in the company.
- To detect and report instances of fraud and other irregularities, the Act provides for all listed companies to have a vigil mechanism, and mandates a Directors' Responsibility Statement to be a part of the Report of Board of Directors.
- It provides for compulsory rotation of individual auditors after five years and audit firms after ten years to rule out malpractices and financial oversight and ensure independence of auditors.
- The auditors are also obligated now to report instances of fraud noticed by them during the performance of their duties.
Serious Fraud Investigation Office (SFIO):
The SFIO under the new Act has a statutory status and has recently also been conferred the power to arrest. The SFIO has been actively investigating cases relating to corporate fraud.
In the years since the Satyam scam broke out, substantial changes have been made with respect to corporate governance in India. The use of criminal sanctions by the Parliament to regulate corporate conduct has been on the rise. The regulators and the investigative bodies are more vigilant. The increased compliance costs of companies only serves well to protect the interests of all the stakeholders in the company.