The continuing Satyam saga has touched a new, horrendous low today with the resignation of the Chairman, B Ramalinga Raju and the shocking explanation tendered by him on the inflated accounts of the company. If the earlier episode of the aborted Satyam-Maytas merger brought into question the role, in corporate governcnce, of board of directors in the overall and that of the independent directors in particular, today’s episode brings into focus an errant axis that could exist amongst the promoters and directors, accountants, auditors and company secretaries (DAACS) in deviant corporations.
Viewed in a relevant perspective, DAACS as a group of corporate officers are trustees of public money that is created, transacted or held through corporate mechanisms. Each of these corporate officers has a specific purpose in an organization that serves corporate as well as public interest.
A director, whole time or part time, has an inviolable duty to provide the right vision, strategy and execution in an ethical climate to the affairs of the company. When a promoter is also a director or the CEO the responsibility becomes even greater. Whatever may be the seed capital with which an entrepreneur sets up a venture, sooner than later the capital structure gets expanded to include external equity and debt that is several, several times over the seed capital that is brought in by the promoter. It is to be therefore expected that the promoter-director acts as a trustee of the public money for public good rather than as a total owner of a corporation which has grown as much through public money as much through the founder’s passion and capital .
An accountant, or the chief financial officer, has the responsibility to ensure that the operations are conducted in a financially prudent and stable manner while fulfilling the corporate aspirations for growth and insulating the company from economic and business risks. Whatever be the IT and accounting systems deployed, it is ultimately the translation and interpretation of physical performance into the financial numbers and the performance certification that is provided by the CFO that determines the solidity and integrity of the financial status of the company.
Equally, significant emphasis is placed on the audit function, both internal and external, to ensure that a company’s operations and financial numbers are in compliance with all the statutory requirements and are reflective of the true state of affairs. Typically however, auditors are a highly pressured lot having to attend to multiple account closures in short windows of time on a quarterly and yearly basis. In any case it may be impossible to check the veracity of each transaction and consequently, reliance is placed on the self-certification by the operations and management teams. This however, does not absolve the auditors of their responsibility to ensure that a company’s systems and procedures are laid out and observed in practice in such a manner that the accounts represent a true and fair reflection of the business.
Last but no less important is the company secretary who is privy to all the agenda, deliberations and minutes of all board meetings. The secretary who in several companies acts also as the responsible officer for corporate governance and risk management has a special responsibility to ensure that the capabilities and competencies of the board are harnessed for the benefit of company operations. It also dwells on the secretary to ensure that the statute and prudential norms are followed in both letter and spirit and compliance as well as violation is reported diligently to the board.
Given the critical roles played by each of the DAACS officer group, a manipulative crisis of the magnitude that has hit Satyam could have been possible only when each member of the DAACS group collaborated, actively or passively, to abdicate the respective responsibilities and in fact acted in complete counter-direction to such requirements.
Obviously, the corporate and regulatory systems would need fundamental changes to avert these types of collusive behavior. Several measures are needed to ensure the needed robustness to the system. For example, the boards should reflect ownership interests in a truly proportionate manner. The independent directors should be appointed by ombudsman and regulatory institutions such as stock exchanges and SEBI. The two core corporate officers (the CFO and the company secretary) should be made accountable only to the board. Larger companies should be required to have two audit firms on a mandatory basis. Corporate compliance reports should be made a part of overall quarterly reporting as well as annual corporate reporting. Banks and financial institutions should have key client managers. The nexus between analysts and corporate managements should be discouraged. Media and industry associations should control their irrational exuberance and cease painting corporate leaders as demi-Gods. There could be several other logical measures.
If the Satyam episode serves as a clarion call for a fundamentally ethical transformation in the way companies are established, grown and managed; in the way corporate performance is compiled, reported and reviewed; and in the way responsible officers think, act and comply with reference to prudential norms, it would have served a purpose, albeit at a high cost.
Posted by Dr CB Rao on January 7, 2009