The Companies Act enhances the role and responsibilities of the Chief Financial Officer
The Indian Companies Act, 2013 is going to make a big impact on Indian corporates in areas including Administration, Accounting & Reporting, Internal Control, Corporate Social Responsibility, and Governance structure.
The various provisions of the Act aim to bring in more transparency and make corporates and those associated with the corporates accountable to the stakeholders.
The Chief Financial Officer (CFO) of the company, due to his pivotal position and significant responsibility, is expected to play a critical role in the changed environment.
The traditional role of a CFO as an accountant responsible only for book keeping and recording debits and credits has changed significantly and the areas of compliance, planning and financial analysis have now become part of his job responsibilities.
In the 21st century, globally this role has been transformed to include aspects such as stakeholder’s management, risk management, strategy building, developing business models, business planning etc.
The Companies Act, in India, has enhanced the responsibilities of the CFO manifold by formally recognising this transformed role.
For the first time, the Act defines the CFO as a person appointed as the Chief Financial Officer of the Company and also stipulates that each company belonging to the prescribed Class of Companies is required to have a CFO on a full time basis.
The person appointed as the CFO under the Act is also considered as a Key Managerial Personnel (KMP). Being a KMP under the Act, the CFO is appointed, remunerated and removed only through a board resolution. The importance accorded to the role of a CFO is primarily due to the onerous responsibilities and obligations imposed by the Act on the CFO.
Now, wherever CFOs are appointed under the Act, they will have to mandatorily sign the financial statements of their companies along with those authorised by the boards. This is in line with the theory of making those responsible for execution to formally acknowledge their responsibilities and accountability to the stakeholder group.
The responsibilities of the CFO for the preparation of the financial statements have also increased due to the various new requirements such as consolidation, separate reporting on the operating effectiveness of internal controls, enhanced disclosure requirements, etc. CFOs are also responsible for providing various inputs for meeting the enhanced board report requirements.
The Act casts tremendous responsibilities on the Audit Committees and the Board and the new requirements include ensuring effective internal control environment, setting up a solid regulatory and compliance framework, formulating a strong risk management platform, providing a robust vigil mechanism, creating a fool proof mechanism for reporting of frauds, and ensuring timely approval for related party transactions.
CFOs have an important role to play in all these areas and they will act as the backbone of corporates in discharging these regulatory responsibilities in a seamless manner.
Also the corporate social responsibilities of the board would not only require the involvement of CFOs in ensuring compliance with the Act, but also in analysing and maximising the value proposition of the same.
Nothing comes free in this world! Along with all the importance gained, now CFOs are made responsible and liable for penalty and/or prosecution for non-compliance with various provisions of the Act such as maintenance of books of account, preparation & filing of annual accounts, disclosure of financial information in offer documents, risk management, internal control etc.
The National Financial Reporting Authority (NFRA) has the power to investigate matters of professional misconduct committed by individual members or the firms of Chartered Accountants, Cost Accountants or Company Secretaries under the respective Acts governing them. So, CFOs, who are professionals, will also come under the NFRA lens, as members of these professional bodies.
There is absolutely no doubt that the Indian Companies Act, 2013 expects a lot from CFOs and thrusts various responsibilities and obligations on them.
The stakeholders firmly believe that Indian CFOs, who are world class professionals, will meet these expectations proficiently and discharge their duties diligently by changing gears and taking on a new avatar.
Very soon, CFOs will become key strategic members of Indian corporates!
The writer is a Partner with Deloitte Haskins & Sells.