Ethical Issues in Accounting & Corporate Governance

-B.V.Raghunandan, SVS College, Bantwal

National Conference,

St.Aloysius College, Mangalore

March 19, 2010

Ethical Issues

• Narrow Approach-Protection of Shareholders’ Interests

• Protection is proved to be a myth time and again

• Failure of All the Agencies and Bodies

• Quite a lot of academic discussion

Corporate Governors

• Promoters• Managers• Independent Directors• Other Directors• Rating Agencies• Stock Exchange• SEBI• Ministry of Finance• Auditors & ICAI

Promoters and Managers

• The main adversaries against shareholders’ interests

• Powers to appoint auditors, rating agency etc

• Manipulates the accounts under the guidance of the auditors

• Misguided for achieving short-term goals

Independent Directors & Other Directors

• Both SEBI and Ministry of Finance are fighting over the issue of number of independent directors rather than their role

• Many a time, related indirectly to promoters and managers, hence having a vested interest

• Denied access to sensitive financial information

Rating Agencies• Depends upon the promoter for

engagement• Existence of multiple rating agencies gives

the promoters and managers to go shopping for the desired rating

• Band wagon mentality (even after a scam breaks out, they continue to recommend the security of the company for investment)

• Claim ‘no access to extra information’

Stock Exchange

• Clause 49 of Listing Agreement• Trading in the securities in the market is its

main concern• Evinced no interest in financial reporting• Inspite of demutualisation, no serious

efforts are made even in stock price manipulation

• It leaves every matter of corporate governance to SEBI

Securities & Exchange Board of India

• More concerned with day-to day management

• Concentration is on securities trading in the stock market

• Lacks wisdom and works against the interest of the investors

• Should have a wing to scrutinise the financial reporting

Ministry of Finance

• Like any other Ministry• Locking the gates after the horses are

stolen• Inefficient and procedure-ridden• Subject to political lobbying• Shifting the blame to other regulatory

agencies

Legal Framework

• Clause 49 of Listing Agreement

• Companies Act

• SEBI Act

Possibility of Total Failure

• All the Regulations can be defeated

• International Accounting Firms are experts in violation

• Bandwagon Mentality• No Foolproof Method of

Evaluation• Even cash can be

manipulated

The Auditors• Depends upon the

Management to be appointed

• Guides the Management in Manipulation

• Acts against the interest of the shareholders

• PriceWaterHouse Cooper is involved as the Auditors in many scandal related companies

Nature of Accounting Standards

• Ever-changing• Deliberately made complex• Scope for creative accounting• Monopoly of ICAI in spite of NACAS• Vested interest of the members• Enforcers and Violators are the same

entity

Agenda for Clause 49• Role of Independent Directors• Government identifying and preparing a

database of independent Directors without any vested interest

• Independent Directors should be vested with the powers of appointing the Auditors

• Expanding the role of independent directors in financial reporting

• Academicians with accounting knowledge as independent directors

Agenda for Accounting Standards

• Based on the assumption that accounting is a passive function and not an active one

• Should be fairly fixed for a long period of time

• NACAS should be made powerful• CAs should be barred from being

members of NACAS• Academicians with no vested interest can

be made members of NACAS

Agenda for Accounting Profession

• Monopoly of CA for accounting and auditing must be done away with

• Members of ICWAI, ICSI and ICFAI must be eligible to audit the accounts

• Post-Graduation in Business Administration and Commerce with dedicated accounting and auditing knowledge should create accounting and auditing professionals

THANK YOU