In the previous article "INVESTOR PROTECTION : A critical analysis with satyam fraud ", I emphasized the problem of the corporate frauds here I am making an attempt to suggest some solutions and overall concluding the whole article as : -
The three important issues for consideration in the Sat yam cases include the following:
1. What is the role/responsibility of independent directors? Are they rubber stamps to affirm the decisions already reached by the promoters or to examine the proposal before approval?
2. Have the auditors exercised due diligence in performing audit?
3. How do we check and prevent corporate frauds in future?
It has been suggested that the Government should consider whether the reference of the different cases in the scam to a special court may not serve the purpose in the event of a joint inquiry through a single agency not being considered feasible on any grounds. The need for a special court may arise after all investigation has been concluded and the stage for prosecution, etc., arises, we are anxious meanwhile that all ideas on the following issues should be cleared in the course of the investigation:
- Why did the Raju's come forward with a disclosure? What was their intention? Will they get mitigation in punishment either in or outside India as a matter of legal right on the strength of this disclosure?
- Has there been any insider trading by the Raju's or anyone else connected with them?
- Were the Raju's not accountable for the diminution in the promoters' holdings and charges to which they were subjected by the loans taken by anyone on the security of the promoters' holdings?
- What were the nature and extent of the diversions of funds from Sat yam to the Raju's or their concerns? Can they be retrieved, if necessary? If so how?
- Is it true that the Raju's have houses ill different countries? If they own them; was the prior approval by the Reserve Bank required? If so, was such approval obtained? From where did the funds for the necessary investments come?
- Should not the internal audit be a concern of an independents agency? If so how best can it be done?
- It has been considered advisable to have supervisory audit? Who should undertake it and when? Should the regulatory authority have anything to do with it?
- Since the credibility of independent directors has been damaged to some extent in the recent developments, how best can such directors be appointed? On what fees? On what terms? Will all this call for any action on the part of the SEBI? '
- Should Satyam be allowed to continue; it is, or should it be taken over by any interested party? What changes in law will the SEBI require in order to obviate the usual pricing and other problems which are attendant on such a takeover?
SATYAM SCAM: WHAT LESSSONS WE LEARNT
Satyam's fraud is a blot on
It is a collective failure of directors, auditors and regulatory agencies in ensuring
transparency and accountability; As a consequence of this fiasco, the overseas client
may take a hard look at most Indian outsourcing companies and investment flows could
be hit. The responsibility for preventing fraudulent activities lies with the Board
of directors. Their acts and conduct impact the reputation of
The Quality Review Board ('QRB'), an independent body set up under the MCA, is looking into the standards of audit for chartered accountancy firms with a view to redefine new stringent norms for audit firms. It may ask the SEBI and MCA to mandate listed companies to rotate their auditors to prevent Satyam-type frauds - practice being followed in public sector companies.
Although the investor’s interest is saved as the Satyam is acquired by the Tech
-mahindra and also the mission had been accomplished of all the 6
Kiran Karnik, Tarun Das,
But, there is impromptu need of time to take the investigation procedure in effective and efficient way to clear every issue and make it sure that such incident will not happen again in future, it is necessary to solve the above questions and to fill the gaps of the loopholes. Also, these Issues to be cleared in the course of investigation
Now, in next topic we will discuss about the present legal systems and provisions of other’s countries to deal with such frauds, an attempt is made to suggest the possible measures which can fill the gaps: -
LEGAL PROVISIONS IN OTHER COUNTRIES TO DEAL THE CORPORATE FRAUDS.
For good corporate governance, Different countries have their own legal mechanism to act, but the fraud and corruption practices act 1977, and Sarbanes and oxley act (SOX) of United states raised widespread anxiety and concern over world for such corporate frauds. The detailed structure of the acts are given as: -
FOREIGN CORRUPT PRACTICES ACT OF 1977
The FCPA is unique. Throughout history, governments have had laws making it illegal
for governmental officials to take a bribe. One basic provision of the FCPA is that
There are two types of bribery provisions. The first prohibits any bribes made directly
by the U.S. Company. The second prohibits any organization from knowingly arranging
for a bribe through an intermediary. Many thought that the FCPA would place
The FCPA includes record-keeping provisions for companies not involved in criminal conduct. These provisions were an amendment to the Securities and Exchange Act of 1934. The FCPA amendment requires all firms under SEC jurisdiction to maintain an adequate system of internal control whether or not they have foreign operations. This provision of the act applies to issuers of registered securities and issuers required to file periodic reports with the SEC.
Accounting Provisions : - The accounting provisions require companies to "keep books and records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets". The purpose of this accounting provision is to make it difficult for organizations to "cook the books" or use slush funds to hide any corrupt payments. Representative means for transfer of corrupt payments included: Overpayments, Missing records ("No receipt"), Unrecorded transactions, Misclassification of costs (bribes recorded as consulting fees or commissions), Re transcription of records, The accounting provisions include a requirement that companies design and maintain adequate systems of internal accounting controls that provide reasonable assurance that:
Transactions are executed in accordance with management's authorization, Transactions are recorded as necessary, and Access to assets is permitted only in accordance with management's authorization
Any internal document that misrepresents the actual nature of a financial transaction could be used as the basis for a charge that the "books and records" section of the FCPA has been violated.
Enforcement : - Enforcement of the act is shared. Civil and criminal enforcement of the bribery provisions for those not required to file with the SEC rests with the Department of Justice. Responsibility for civil enforcement of the bribery provisions for those who have SEC filing requirements rests with the SEC.
In 1988 the FCPA was amended to allow for "facilitating payments" for expediting routine governmental action. These payments are distinguishable from corrupt payments in that these "grease payments" are for facilitating the performance of officials who are obligated to perform said duties. Questions regarding this amendment, affirmative defences, or other provisions of the FCPA should be directed to counsel, or companies may wish to use the Department of Justice's Foreign Corrupt Practices Act Opinion Procedure. Under this procedure, upon receiving a question from a company or individual, the attorney general has thirty days to issue an opinion regarding the inquiry. The objective is to alleviate uncertainty regarding acts covered by the FCPA.
Penalties : - The FCPA provides penalties for violations. Criminal penalties for bribery violations include fines of up to $2 million for firms; fines of up to $100,000 and imprisonment of up to five years for officers, directors, and stockholders; and fines of up to $100,000 for employees and agents (fines imposed on individuals cannot to be paid by companies). The SEC or attorney general may also bring actions that lead to civil penalties. Also, the act's penalties do not supersede penalties or fines levied under the provisions of other statutes. A violation of the bribery provisions of the FCPA may give rise to a private cause of action for treble damages under RICO (Racketeer Influenced and Corrupt Organizations Act).
The penalties can have long-term ramifications for companies. For example, a company found guilty of violating the FCPA may be barred from doing any business with the federal government. A company indicted for an FCPA violation may not be eligible to obtain various export licenses.
Compliance : - Clearly, large multinational corporations cannot monitor every transaction of every dollar amount by every employee. However, companies do have a due-diligence obligation to implement adequate systems with sufficient internal controls. Key ways to avoid violation and liability include establishing policies and procedures that provide reasonable assurance that the business is adhering to the act's provisions.
: - On November 1, 1991, the Corporate Sentencing Guidelines Act was enacted. The guidelines appear to be a direct descendent of the FCPA. The guidelines for organizations "are designed so that the sanctions imposed upon organizations and their agents will, taken together, provide just punishment, adequate deterrence, and incentives for organizations to maintain internal mechanisms for preventing, detecting, and reporting criminal conduct"
In most corporations, accountants and auditors have responsibility to prevent, detect, and report errors and irregularities. The Corporate Sentencing Guidelines are legislation to deter white-collar crime. The guidelines' major objective is requiring organizations to monitor business activities to detect criminal conduct within their own ranks. The guidelines allow organizations to use mitigating factors to reduce their exposure to fines. One mitigating factor is maintaining a corporate compliance program. The corporate compliance program is to be the responsibility of an officer or high-level employee.
THE SARBANES-OXLEY ACT OF 2002
The Sarbanes-Oxley Act of 2002 also known as the Public Company Accounting Reform and Investor Protection Act of 2002 and commonly called Sarbanes-Oxley, Sarbox or SOX, is a United States federal law enacted on July 30, 2002 in response to a number of major corporate and accounting scandals including those affecting Enron, Tyco International, Adelphia, Peregrine Systems and WorldCom. These scandals, which cost investors billions of dollars when the share prices of the affected companies collapsed, shook public confidence in the nation's securities markets. Named after sponsors Senator Paul Sarbanes (D-MD) and Representative Michael G. Oxley (R-OH), the Act was approved by the House by a vote of 334-90 and by the Senate 99-0. President George W. Bush signed it into law, stating it included "the most far-reaching reforms of American business practices since the time of Franklin D. Roosevelt."
SOX was adopted in July 2002, slightly less than a year after the Enron scandal broke, amid a tanking stock market. A flurry of congressional hearings was held on the company's collapse, its causes, and potential legislative solutions, commencing in December 2001 and continuing beyond the enactment of the legislation. The House passed a bill in April 2002, after the House Financial Services Committee had held seven hearings on Enron and proposed legislation. But legislation was not considered by the Senate until shortly after WorldCom's collapse in July 2002. Only one of the corporate governance mandates adopted in SOX appeared in the House bill, a more limited restriction on the provision of non audit services by auditors than what was enacted. the other mandates, along with a more stringent prohibition on non audit services, were introduced in the Senate.
The legislation establishes new or enhanced standards for all
The Act establishes a new quasi-public agency, the Public Company Accounting Oversight Board, or PCAOB, which is charged with overseeing, regulating, inspecting, and disciplining accounting firms in their roles as auditors of public companies. The Act also covers issues such as auditor independence, corporate governance, internal control assessment, and enhanced financial disclosure.
THE JOINT PARLIAMENTARY COMMITTEE REPORT
The Joint Parliamentary Committee (JPC) set up to investigate the securities market scam of 1999-2001 involving the Ketan Parekh, some other brokers and bankers, observed as follows:
Investors confidence in the market
- "investor protection is a continues exercise and not a one-time effort.
A recent survey done by National Council of Applied Economic Research for SEBI reveals
that only a nominal portion of household savings flows into the capital market.
The main reason for such insignificant flow can be attributed to lack of confidence
of the retail investors in the capital market. It has been observed that poor disclosures
at the time of public issue and manipula tive pricing of the 'issues' by the companies
often result in robbing the uninformed investor. In order, therefore, to ensure
that the investors are '-well informed, it is not only very important to have full
disclosures but also to ensure that these are authentic." (
Disclosure practices and IPO pricing
- "The prospectus is not vetted by SEBI, with the result that promoters are
able to bring public issues at highly manipulative prices. It is, therefore, imperative
that SEBI should formulate suitable guidelines for evaluating the prospectus and
in case of dubious or fraudulent promoters, it must stop the public issue. As regards
IPO’s (initial Public Offerings), two vital issues - pricing and tracking the end
use of funds-have been totally neglected by SEB!. While determining pricing is a
difficult task, there can be differences of opinion about the price genuinely, but
to leave this entirely to the discretion of management based on the recommendations
of the merchant bankers, does not serve ·the interests of small investors, The very
fact that during the mid nineties in many cases, dishonest management of the companies
cheated the IPO investors of thousands of crores by bringing out highly overpriced
issues and SEBI did not react, on the plea that ill the free market regulator need
not interfere, is not acceptable to the Committee. Totally free market pricing in
a market which is highly imperfect and has a long history of fraud and manipulation
is not a workable solution. Fair pricing through the book trading rules has also
failed to achieve the desired results. It is, therefore, suggested that SEBI should
either use industry benchmarks or -evolve other suitable criteria for this purpose.
SEBI and DCA have been quibbling for the past many years, each one saying that to
determine the end use or the funds raised through IPO was not its responsibility,
with the result then manipulative promoters have had full liberty in diverting the
funds. The Committee is of the view that this responsibility must be discharged
by SEBI and the management of defaulting companies should be suitably punished." (
Investors' education - "Investors' education plays a vital role in en3.b!ing investors to take informed decisions and to ensure that their interests are protected. It appears that not much has been done in this area by SEBl: except issuing some advertisements, circulation of booklet and fund of seminars by Investor, Associations (para14.58 of the Report).