It is the duty of the directors to protect the interests of the shareholders and other stakeholders in accordance with the definition of the corporate governance. This relationship has really become complex with lot of corporate scams happening around, global economic crisis and business dynamics.

The Company Bill 2012, over and above the present requirements of the Directors’ Responsibility Statement has added two important requirements. These are responsibilities towards laying down internal financial controls and devising proper systems to ensure compliance with the provisions of all applicable laws and effectiveness of these systems.

Though it seems simple, the proposed changes have far reaching implications. Let us analyse the new requirements.

A) The requirement relating to laying down internal financial controls and their effectiveness would be applicable to the listed companies only [Clause 134 (5) (e)]

The requirement talks about:

•Laying down internal financial controls

•Adequacy of these controls; and

•Their effectiveness in operation

The explanation given to the clause 134 (5) (e) defines the term ‘internal financial controls’ as the policies and procedures adopted by the company for ensuring the orderly and efficient conduct of its business, including adherence to company’s policies, safeguarding its assets, prevention and detection of frauds and errors, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial information.

A plain reading of the clause indicates that directors will be responsible for everything under the sun as far the company’s operations, finance, compliance reporting is concerned.

The words “for ensuring the orderly and efficient conduct of its business” are very subjective and a lot of judgment will be required in evaluating the existing policies and procedures of the companies.

Second, it makes reference to policies and procedures for “the prevention and detection of frauds and errors”. This would be the challenge for the companies and directors as the controls to prevent and detect fraud and errors include much more than the transaction level controls. It will include a mechanism to identify the fraud, carry out the investigations and a revisit to preventive controls – system and manual both.

B) Clause 134 (5) (f) requires the directors to device proper systems to ensure compliance with the provisions of all applicable laws and that such systems were adequate and operating effectively.

This clause would be creating a two-fold challenge for the directors. First, ensuing completeness of compliance with provisions of all applicable statutes and second – evaluation of these systems for adequacy and operating effectiveness. Directors will have to get this assurance from the management of the company by modifying the way they currently receive information and would have to ask more questions to the management. In many areas they will have to engage independent experts to get such an assurance.

To take care of the additional responsibilities, the directors will have to increase their involvement in the entire governance process of the companies. Since these requirements are going beyond financial reporting, it appears that the companies would have to identify and evaluate areas involving non-financial areas also such as human resource, propriety of significant purchases. As far as controls over financial reporting are concerned, these is no need to reinvent the wheel. The directors can also use the existing mechanism for CEOs/CFOs certification for complying with the Clause 49 of the listing agreement.

Contrasting with the requirements of the Sarbanes-Oxley Act - Section 404 which only talks about controls over financial reporting, the proposed requirements cover controls over and above financial reporting. Is this really intended? New challenges await the directors of the listed companies.

(Hemant M. Joshi is Partner and Nikhil Kenjale is Manager, Deloitte Haskins & Sells.)

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