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About 100 sections of Companies Act, 2013 have been enacted already, and there is understandable anxiety over India Inc’s readiness. A key provision pertains to the auditor’s responsibility to comment on the adequacy (design) and operating effectiveness of a company’s internal financial controls.
While the Securities and Exchange Board of India mandated certain corporate governance provisions through clause 49 of the listing agreement, the Act seems to prescribe a more holistic approach. Auditors now have to conduct a more integrated audit, opining both on financial reporting and internal controls.
Experts say the requirements are similar to those under the Sarbanes Oxley Act (SOX) enacted in the US in 2000 for public companies. While it is unrealistic to expect all companies to have robust internal financial controls, the cost-benefit analysis is usually in favour of large and complex public companies. However, one can draw important lessons from the SOX experience.
Practical guidelines
Indian regulators have currently included only enabling provisions in the Companies Act, and the detailed rules and guidelines will be notified later. In the US, the Committee of Sponsoring Organisations (COSO) develops frameworks and guidance on enterprise risk management, internal control and fraud deterrence. Their recommendations are comprehensive and widely adopted.
In contrast, India has scanty literature and almost negligible guidance for auditors. Regulators should prescribe guidelines that are practical and fully cognisant of the operating style of Indian businesses.
Skill development
Such complex, sweeping changes call for significant investment in training professionals. The accounting profession’s curriculum should facilitate a better understanding of the intricacies of internal financial controls. Certification and continuing professional education courses could supplement this.
Monitoring and enforcement
The Public Company Accounting Oversight Board was established in the US to ensure that the true intent of SOX is fully delivered.
The board issued its own standards, including comprehensive guidance on effective auditing.
It makes annual inspections of public company auditors as part of enforcement.
Similarly, Companies Act prescribes setting up an oversight body — the National Financial Reporting Authority (NFRA).
One hopes that with dynamic leadership and the ability to use the special powers of a civil court, the authority can meet stakeholder expectations.
The vastness of internal financial controls and their reporting should not be underestimated by regulators and professionals.
Adequate planning and phased implementation can ensure a seamless transition.
In the long run, Indian capital market will enjoy the transparency, robustness and investor confidence it deserves.
(The author is a chartered accountant)
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