Does India need an act like Sarbanes-Oxley?

Dr. Anurika Vaish

Divisional Head (MBA-IT and MSCLIS)

IIIT, Allahabad

Prince Agarwal & Shivi Tyagi

MBA-IT (Batch: 09-11)

IIIT, Allahabad

Corporate governance and ethics are the corner stones of sound business environment. These ingredients have often made us realize their worth, as we have encountered blunders shaking public confidence in security markets. In lieu of such events, there arises a need to frame and implement laws which can safeguard the public interests and lay down the foundation of a secure market. In response to such critical issues, the government has to play a very crucial role and has to come ahead with laws and acts so as to exercise control and maintain creditability. Enron is one such instance of fraud, which has led to birth of a new act. Enron, a natural gas selling company established in 1985 and seventh largest company on Fortune 500 before it collapsed, plunged into energy markets, and gained popularity among investors and drove stock prices up. It underwent expansion program, entering into internet services, investment into new ventures, increased borrowings, and then to veil the debts, came into being as partnership, ‘Chewco investments’. The duo kept $600 million in debts off of the books, and thus dilusioned the government and the people who owned the Enron stock. December 2000, Enron claimed to have tripled its profit in two years. Arthur Andersen Houston, the auditors, was equally responsible in the breach of public interest by certifying the company’s financial statements and hiding $1 billion losses. Securities Exchange Commission (SEC) ordered a probe, following which Enron admitted to have overstated the profits for the past four years by $586 million and the debts stood at almost $6 billion. The stock plummeted and Enron had to repay the money to the investors, unable to do so it declared for section 11 bankruptcy. Following the similar kind of pattern were Tyco International, Adelphia, Peregrine Systems and WorldCom.

In response to such corporate and accounting scandals, the US federal body incorporated a Public Company Accounting Reform and Investor Protection Act, 2002, which came to be known as Sarbanes-Oxley Act (SOX) of 2002. It was named after U.S. Senator Paul Sarbanes and U.S. Representative Michael G. Oxley and President George W. Bush signed it. The legislation lays down enhanced standards for all U.S. public company boards, management and public accounting firms but does not apply to private firms. The act includes 11 titles,

Spanning from corporate board responsibilities to criminal penalties.

It emerged as the single most important piece of legislation affecting corporate governance,

Financial disclosures, and practice of public accounting.

The act creates a quasi-public agency, the Public Company Accounting Oversight Board (PCAOB), responsible for overseeing, regulating, inspecting and disciplining accounting firms in their roles as auditors of public companies.

The act incorporated provisions like, certification of financial reports by CEO’s and CFO’s to ensure accuracy and reliability of financial disclosures, auditor independence, tough penal actions against corporate executives misstating financial statements and ensuring employee protection.

When the American energy multinational Enron Corp collapsed, none would have thought that similar things were also cooking up at the same time at Satyam Computers, India’s fourth largest software services exporter and the first Indian company to be listed on three international stock exchanges Mumbai, New York & Amsterdam. The image of Indian Corporate was doubted when Satyam’s chairman B. Ramalinga Raju confessed of over inflating the value of cash and bank balances by Rs. 50.4 bn, understating the liabilities by Rs. 1230 crores along with non-existent accrued interest of Rs. 376 crores. This in fact was a wake up call for India, to look into the quality of financial information that is put across the public. Experts and industry watchers stand divided, as to how such a debacle has made promoters sit up and make alterations or nothing has changed in real sense of term. Moreover the issue also questioned the responsibility of the Auditing firms who are liable for the assurance that the financial disclosures are fair enough to rely upon. The "Clause 49" of the Securities and Exchange Board of India (SEBI) focuses across the corporate universe and pertains to corporate governance and lies down that at least one-third of the board must consist of independent directors with stronger audit standards and better financial disclosure norms. But such an imbroglio shows that clause 49 had not that radical effect in preventing misgovernance. To what an extent the external auditor can be ‘independent’ to opine on the management report? How comfortable the management is with disclosure protocols? Are some of the questions which prove to be a constraint for the law.

Evaluating relevance and implementation feasibility of SOX Act in the Indian scenario, one can find that the diverse cultural and business environments restrict its implications. Though it focuses on good business ethics, corporate governance but the compliance cost is still a major concern, as India being a mixture of various large scale and medium scale concerns for which it will be a demanding job. Another issue related to it lies in the fact that it does not apply to non profit organizations (NPOs), which form a significant chunk in the Indian corporate world amounting to nearly 1.2 million. Such an issue is meant not only to focus on ‘abiding by the law’ i.e. reporting the requirements but to actually value the ‘spirit’, the corporate governance to nurture a healthy, secure and efficient financial platform. But it is difficult to evaluate that how many do actually abide by law, and realize the vital role it plays in underpinning the integrity of a secure financial market. India still needs to answer the call, as to how, can we refrain from another ‘Satyam’ to mushroom under the nose of our governance and astound us all over again. In the current scenario of corporate world, there is a need to improvise on the business policies, but the question still remains unanswered, whether the existing Company Act of India, is potent enough to deal such unhealthy occurrences?

Does our regulatory authority SEBI needs to undertake some stringent steps to counter the breach?

Or we have a scope of implementing a new act, one like Sarbanes Oxley Act?

References:

1. http://www2.sa.unibo.it, retrieved on 18-8-2009

2. http://www.icai.org, retrieved on 18-8-2009

3. http://www.valuenotes.com, retrieved on 18-8-2009

4. http://www.wikipedia.org, retrieved on 18-8-2009