The Hindu Business Line : Corporates wary of proposed special audit

INDIA Inc has expressed apprehensions that the `special audit' system proposed in the concept paper on revamped company law could lead to leakage of confidential matters of a company. In other words, a company ends up disclosing more than required, thus giving competitors an upper hand.

"The point for consideration is whether special audit is at all needed," a corporate leader said. In fact, a section of corporate sector has advocated for doing away with the proposal.

According to the concept paper, special audit would be conducted on Government directives either by a chartered accountant, a cost accountant or a firm of professionals, who shall report to the Central Government instead of the members of the company.

The Central Government may direct a special audit of a company's accounts if it is of the opinion that the affairs of the company are not being managed in accordance with sound business principles or prudent commercial practices.

"One is also not sure whether such an audit would be able to prevent corporate malpractices. To prevent malpractices, we need to create mechanisms for three things - detection, investigation and remedy. The Companies Act in its present form already has elaborate systems for the same," a FICCI official said.

Though special audit by itself cannot do much harm, the provisions that can cause trouble to the company and its investors are the remedial powers that allow the Government to appoint directors and remove managerial personnel, he added.

Besides, corporates said, one cannot be sure as to how far such an audit can be useful and what would happen even if there were adverse findings? "Would it be tantamount to contravention of the law?"

According to corporate law experts, perhaps the only power with the Government is to remove the managerial personnel for such adverse findings.

The special audit proposal in the concept paper for compressed company law is based on the recommendations of the Naresh Chandra Committee on Corporate Audit and Governance, which was set up to examine the auditor-company relationship.