In case of financial irregularities and mismanagement, the spotlight is on sounding board and the auditors for their role in stopping such mishap to happen or red flag before it damages the confidence and then the regulators are forced to take extreme steps to shield the stakeholder’s interest. Certainly, the nature and complexity of the governance issues faced would differ in case of promoter driven entity, startups, SME, non-corporate entities which generally have less regulatory requirement and monitoring.
Recently there is noise heard on sensitive matters like:
- Fund diversion
- Governance issues in fintech company and large stock exchange
- Independent directors resigned citing serious lapses in management of the company
- Outcome of annual general meeting not circulated which was done only when SEBI instructed
- Insider trading issues
- Mismanagement in NBFC
In the light of above, the management need to have strategy to safeguard the interest of the stakeholders and protect the goodwill of the organization.
Recommended areas for the Board which can enable to strengthen the Governance and add value to the Organization
1. Functional HOD to present the Risks and Strategies of their department to the Board members on periodical basis.
Such independent dialogue will enable the HOD to share their perspective to the core group. This will assist in multiple ways but the basic objective of the Committee is to understand and sense if any areas need navigation and regular monitoring.
2. External audit of processes and practice followed
Generally, the focus of the management is on the high-risk areas to standardize the procedures, periodic internal and external audits, follow-up and implementation of suggested best practices. Audit committee (which is a part of the Board) may also consider the following suggestions in these areas:
- Include low risk areas at lesser frequency
- Generally in-house department of the entity monitors functions of statutory compliances like direct tax, indirect tax, local taxes, and contract labour compliances. External expert on the subject matter may be involved to carry out the complete compliance check-up at periodical intervals.
- The management may have more than one internal auditors and allocate / rotate areas amongst them.
- There is traditional audit procedure of obtaining direct balance confirmation by the statutory auditors of the entity from banks, customers and vendors for period end balances to identify any gaps in accounting. Similarly obtain feedback from customers and vendors of the organization and then carry out independent review by the external auditors of such feedback, which will ensure that the outcome is not biased and unfiltered.
3. Frequent Town Hall meetings
Mere displaying ‘Employees Code of conduct’ on website of the entity or uploading recorded videos will not help in achieving the desired result but it only take care of compliance. Rather, live town hall sessions with smaller group of HOD, Executives and one level down, cross department will enable the management to have more interaction and two-way communication. This forum may also discuss about the work environment, cultural misfits, sharing of critics and whistle blower mechanism. Coaching and mentoring with right fundamentals is the need of an hour to inculcate the spirit of governance
4. Develop internal framework for rotation of job-responsibilities
Rotation of primary responsibilities on periodical basis will encourage new learnings and develop versatile skills amongst the employees. This will have far greater impact for key functional areas like marketing, treasury & finance, business development, human resource.
5. Critics meeting for key decisions and monitoring
Organization need a tough Censor Board before rolling out the strategic decisions. Such matters may include:
- Key managerial person related on-boarding or termination or renewal of term
- One-off related party transactions
- Robust mechanism to ensure the borrowed funds are not misappropriated or diverted
- Appointment of relative of KMP / founders in the organization with lead role which otherwise require independence and unbiased perspective.
Role of Statutory Auditors
Eye of Statutory Auditors certainly look into internal financial control over financial reporting and discuss the key audit matters with those charge with governance i.e. audit committee and board of directors. Audit tools are being adopted for sampling & other audit procedures which assure that there is no subjectivity or biasedness. Effective financial year 2021-2022, there are additional reporting requirements on the auditor on matters like cash losses incurred, ever greening of loans, diversion of funds etc., which will be relevant for stakeholders.
Conclusion
Sounding Board may have to take tough calls and prompt actions in situations of turbulence in governance environment. It is preferred to make timely communication to stakeholders for transparency and avoiding grapevine. Setting-the tone at the Top management is fundamental and right approach since ages that management need to be adopt.
The writer is Partner, N.A. Shah Associates
