New Delhi: Study conducted by CII, Protiviti Member Firm for India and NFCG on Independent Directors (IDs) brings to fore an in-depth perspective on questions relating to the adequacy of internal controls and governance frameworks in companies. The report released at an event today emphasizes on the challenges faced by IDs in recent years towards confidently discharging of their duties with respect to internal controls amidst an upsurge of corporate and accounting frauds.
Speaking on the findings from the study Mr. Puneet Gupta, Managing Director, Protiviti Member Firm said, “Internal Financial Controls form the bedrock for ensuring good corporate governance, preventing fraud and financial reporting irregularities. It has been observed while shaping the study report that 89% of the IDs believe that health of Internal Controls is not as robust as they are reported in company annual reports. Elaborating on the way forward, he added, “Companies will need to focus effectively on critical areas that includes strengthening of internal controls, risk and governance framework, clear segregation of responsibility between Key Management Personnel, Executive Directors and IDs, and ensuring board diversity in terms of both industry and functional expertise.”
As per the study, 70% of the IDs interviewed believe that the legal action against the community has been extreme and over 80% said that there are insufficient legal safeguards to protect them from unfair persecution and reputational damage, compelling many IDs to seek advisory position in companies instead of board positions. This could result in a parallel corporate governance structure, and smaller or newer companies may not be able to attract high quality directors.
Speaking at the release of the report Mr. Ajay Bahl, Chairman CII Task Force on Judicial Reforms Co-Founder & Managing Partner AZB & Partners said, “Corporate Governance is not merely about compliance. Owing to reasons such as protection of investor interests, promotion of transparency, raising disclosure standards to international levels, and building public confidence, CII has emerged as a forerunner in corporate governance movement in India. This study report stands out to be one such endeavour, intended for voicing of pertinent issues by Independent Directors on need for companies to be more cognizant of their internal control parties and governance behaviour”.
The study highlighted that 52% IDs believe that Auditors do not provide adequate inputs and there is a need for improvement in the way they discharge their role. Key risks and controls related to several important areas like operational controls, cyber and data security, fraud, investment risks are not getting adequate importance.
As per 60% of IDs, the roles and responsibilities as defined by the Companies Act are unreasonable and onerous. While IDs have to provide written assurances confirming the framing of Internal Financial Controls and compliance to applicable laws, this goes beyond their scope as non-executive members. Another 60% say that they do not have adequate resources to confirm the health of internal controls, relying on the integrity of the information shared with them by the Management and Auditors while assessing the company’s decisions and detecting deficiencies.
The study was an engaging exercise with one-on-one in-depth interviews with over 100 Independent Directors participating from companies across industries, including multinational corporations, Indian conglomerates, and other businesses. Annual reports of 150 companies were examined for two consecutive financial years, focusing on types and instances of disclosure around IFC by the directors and the auditors.
The role of IDs is becoming increasingly crucial as they guide the management on best practices and fair standards that can be imbibed by organizations. However, performing these duties comes with their own set of impediments for IDs and they need support of the Management to overcome them.
