In the last 10 years, there have been more legislations on corporate governance than ever before. The latest Dr JJ Irani Committee Report has taken the wheels further ahead and raised many a controversial issue in the media.
Irani once saw audit committees as an "unnecessary nuisance". Today, in an interview with Manas Chakravarty and Freny Patel, he said with India's wealth running into trillions, and invested in various corporates, "audit committees are essential in the building of good governing force to ensure that the wealth increases and is protected". Excerpts from the interview:
On why the market is important for corporate governance:
When corporates are hammered in the market, that will bring about corporate governance. In the US for instance, CalPERs is the biggest pension fund, which has known to have removed directors, dissolved boards and chairmen. In future Indian corporates too will have to gear up and be ready to yield to investor pressure.
On internal auditors reporting to the audit committee:
What we are proposing is for the audit committee to have full exposure to the audit department itself. In our Tata companies, the internal auditor reports directly to the audit committee.
That way, we have opened up the communication channel, and these members can ask for details. Ninety per cent of the questions can be covered by that, plus independent directors can call for audits to be carried out if they feel the statutory auditor and management are hand-in-glove.
On the liability of independent directors:
Independent directors should only be held liable if they are in the know of events. For instance, if a cheque bounces, directors can only be held liable if they are aware of the event. Otherwise it is unfair to hold an independent director responsible.
On the main issues before the audit committee:
Independent directors need to put in more time. That is the key issue confronting independent directors today, as they go with the idea of having to spend just a couple of hours when meetings could in fact last for days. At the same, their attitude also needs to change.
On the ignorance of audit committee members:
There are many audit committee members who choose not to ask questions since they feel it would show their ignorance.
With the KPMG's initiative for the establishment of the Audit Committee Institute, one would have means to find out what one does not know.
On the need for rotation of auditors:
It is the quality and integrity of auditors that is more important than the limitation of time span. About 15-20 years ago, in one of the Tata group companies, when we wanted to change the auditor, it was looked down upon.
Today there's a view that auditor firms should be changed regularly. Both views are extreme.
On controversy regarding percentage of independent directors:
We have said minimum one-third of the directors need to be independent. Nothing stops corporates from having one-half or two-thirds, or three-fourths. The issue is not quantity but quality of independent directors. Hardly any decisions are taken by vote.
Hence it is immaterial whether the percentage of independent directors is one-half or one-third. It is the quality of directors which will serve the purpose of corporate governance.
On role of the audit committee being more of policing:
Part of their role is that of policing. But their main role is to ensure that proper systems are followed, and if not, then their fact-finding role can be turned into a policing role. A good system needs to be in place.