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Presented By Presented By

CA Swatantra Singh,CA Swatantra Singh, B.Com , FCA, MBAB.Com , FCA, MBA Email ID: Email ID: singh.swatantra@gmail.com

New Delhi , 9811322785New Delhi , 9811322785,, www.caindelhiindia.com, www.caindelhiindia.com, www.carajput.comwww.carajput.com

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Section ISection I The Need for Corporate GovernanceThe Need for Corporate Governance

Responsibility to StakeholdersResponsibility to StakeholdersPredictabilityPredictabilityTransparencyTransparencyAccountabilityAccountability

Easier access to capital (FII, VCF)Easier access to capital (FII, VCF)

Efficiency (at the firm level) and Global Efficiency (at the firm level) and Global Competitiveness (IPRs)Competitiveness (IPRs)

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Section IISection IIConceptualizing Corporate GovernanceConceptualizing Corporate Governance

Narrow DefinitionNarrow Definition- A set of - A set of relationshipsrelationships between the company and between the company and

shareholders, directors and management.shareholders, directors and management.

Broad DefinitionBroad Definition- Going beyond and looking to the implicit and explicit - Going beyond and looking to the implicit and explicit

relationships of the company with relationships of the company with employees, employees, creditors, consumers, distributors, local creditors, consumers, distributors, local communitiescommunities..

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Conceptualizing Corporate Governance Conceptualizing Corporate Governance (Contd.)(Contd.)

OECD DefinitionOECD Definition– System by which corporations are System by which corporations are directed and controlleddirected and controlled. . – Spells out the rules / procedures for making decisions on corporate Spells out the rules / procedures for making decisions on corporate

affairs. affairs. – Provide the structure through which the company Provide the structure through which the company objectivesobjectives are set, and are set, and

the the means of attaining means of attaining those objectives and monitoring performancethose objectives and monitoring performance – Specifies the distribution of rights and responsibilities among different Specifies the distribution of rights and responsibilities among different

participants in the corporation, such as, the board, managers, participants in the corporation, such as, the board, managers, shareholders and other stakeholdersshareholders and other stakeholders

World Bank DefinitionWorld Bank Definition– Corporate governance is about Corporate governance is about promoting corporate fairnesspromoting corporate fairness, ,

transparency and accountabilitytransparency and accountability

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Conceptualizing Corporate Governance Conceptualizing Corporate Governance (Contd.)(Contd.)

What constitutes shareholders’ interest? sustainable What constitutes shareholders’ interest? sustainable profitability versus profitabilityprofitability versus profitability

Need for external regulationNeed for external regulation– FOR:FOR:

» Conflict of interest b/w Management/Promoters and other Conflict of interest b/w Management/Promoters and other constituenciesconstituencies

» To protect small investorsTo protect small investors» To account for ExternalitiesTo account for Externalities

– AGAINST:AGAINST:» Risk of excessive policing (time & cost of compliance)Risk of excessive policing (time & cost of compliance)» Increase costsIncrease costs» Check the box approachCheck the box approach

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Section IIISection III Evolution of Systems of Accountability: Evolution of Systems of Accountability:

Indian InitiativesIndian Initiatives In December In December 19951995, , CIICII set up a task force to design a voluntary set up a task force to design a voluntary

code of corporate governancecode of corporate governance In April In April 19981998, the Desirable Corporate Governance: A , the Desirable Corporate Governance: A CodeCode, was , was

releasedreleased SEBISEBI set up the set up the Kumar Mangalam BirlaKumar Mangalam Birla Committee in Committee in 19991999 to to

design a mandatory-cum-recommendatory code for listed companies design a mandatory-cum-recommendatory code for listed companies ((Clause 49Clause 49))

DCA DCA set up the set up the Naresh Chandra Naresh Chandra Committee Report in Committee Report in 20022002. The . The key recommendation related to key recommendation related to financial and non-financial disclosures and independent auditing and board oversight of management (Draft Companies Bill)

The The Narayana Murthy Narayana Murthy Committee was set up by Committee was set up by SEBI SEBI in in 2002 2002 to to review clause 49 and suggest measures to improve corporate review clause 49 and suggest measures to improve corporate governance standards (governance standards (Proposed Clause 49Proposed Clause 49))

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Developments in the U.SDevelopments in the U.S ENRON

– Bankruptcy filing in 2001 (largest in US history) – Accounting techniques involving unconsolidated partnerships

and “special purpose entities” to hide losses from financial statements & conceal indebtedness.

– Issues regarding independence of auditors, provision of non audit services & conflict of interest

– Independence of directors

SARBANES OXLEY ACT, 2002 (SOX)– Signed into law July 30, 2002– Enhances reporting obligations of public companies to prevent

securities fraud & other abuses

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SOXSOX

Applicable toApplicable to::– Companies listed or traded in the U.S (including non U.S Companies listed or traded in the U.S (including non U.S

Companies)Companies)

– Subsidiaries of U.S Companies in India (provided they Subsidiaries of U.S Companies in India (provided they have a business connection in the U.S)have a business connection in the U.S)

– Foreign accounting firms that prepare or furnish audit Foreign accounting firms that prepare or furnish audit report for an issuerreport for an issuer

– Sometimes compliance expected by U.S Companies Sometimes compliance expected by U.S Companies from business partners in India (implications for BPO from business partners in India (implications for BPO sector) sector)

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SOX-Brief OverviewSOX-Brief Overview

CEO & CFO certificationCEO & CFO certification in SEC Reports (Ss 302 & 906) in SEC Reports (Ss 302 & 906)– Compliance with Securities Exchange Act, 1934Compliance with Securities Exchange Act, 1934– Financial statements represent the true financial condition of Financial statements represent the true financial condition of

the Company operationsthe Company operations– Financial results contain no untrue statement /Financial results contain no untrue statement /omission of omission of

material factmaterial fact– Company has complied with Disclosure normsCompany has complied with Disclosure norms– Management have disclosed significant deficiencies, changes, Management have disclosed significant deficiencies, changes,

fraud to auditors & audit committeefraud to auditors & audit committee Ban on loans to executive officers and directorsBan on loans to executive officers and directors Accelerated filings of periodic reportsAccelerated filings of periodic reports Filing of change of beneficial ownership within 2 daysFiling of change of beneficial ownership within 2 days

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SOX-Brief Overview (Contd.)SOX-Brief Overview (Contd.)

Reimbursement by CEO/CFO upon restatement of financial statements due to misconduct– Bonus/other incentive based compensation– Profits from sale of securities

Independence of Board of Directors/ Committees

Enhanced Criminal Penalties (upto $5 million fine for individuals, $25 million for entities, prison terms upto 20 years)

Strict Reporting of illegal or unethical behavior

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SOX-Brief Overview (Contd.)SOX-Brief Overview (Contd.) Audit Committee

– Independent– Financial Literacy of members – At least one financial expert – Responsible for appointment, compensation &

oversight of auditor & approval of audit/non audit services

– Create compliant mechanism regarding accounting and auditing

– Approve all related party transactions Implementation of a ‘Whistleblower’ policy

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SOX-Brief Overview (Contd.)SOX-Brief Overview (Contd.)

Additional Disclosures – Off Balance Sheet Items & transactions that may

have material current/future effect on financial condition/results of operations

– Pro forma Information must conform to financials prepared under GAAP - No untruth/omission

– All fees billed by auditors in annual report– Audit Partner Rotation– Registration with Public Company Accounting

Oversight Board (including foreign audit firms that audit Issuers)

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Major Areas of DebateMajor Areas of Debate

Directors

Independent Directors

Audit Committees

Auditors

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Section IVSection IVDirector: The FiduciaryDirector: The Fiduciary

“If directors act within their powers, if they act with such care as is reasonably to be expected from them, having regard to their knowledge and experience, and if they act honestly for the benefit of the company they represent, they discharge both their equitable as well as their legal duty to the company”

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WHO DO DIRECTORS OWE A DUTY WHO DO DIRECTORS OWE A DUTY TO?TO?

COMPANY

SHAREHOLDERS

EMPLOYEES

PUBLIC

CREDITORS

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General Duties of DirectorsGeneral Duties of Directors

Duty of care and skill Duty of loyalty & disclosure Duty of disgorging profit in relation

to corporate opportunity

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Duty of Care and SkillDuty of Care and Skill

A director or officer has a duty to the corporation to perform his functions in good faith, and in a manner that he reasonably believes to be in the best interest of the corporation, and with a care that an ordinary prudent person would reasonably be expected to exercise in a like position and under similar circumstances

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Duty of Care and Skill (Contd.)Duty of Care and Skill (Contd.) Courts in UK and USA have held that directors in banks and financial institutions owe a higher degree of care

– The banking industry is involved in regular receipt of public cash and property and is thus more vulnerable than other businesses and therefore a greater care is required;

– A director of a company (a bank) that has a large amount of liquid assets carries with him higher risks and temptation to which such assets give rise;

– There are more legislative and regulatory monitoring and liability provisions pertaining to banking companies than any other company and such provisions may also extend to the director of the bank or financial institution.

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Duty of Care and Skill (Contd.)Duty of Care and Skill (Contd.)

Exercise reasonable care, skill and diligence

Continuing knowledge of company’s business

Reliance on Co-directors and Power to delegate with supervision

Bona fide and good faith intention

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Duty of Loyalty & DisclosureDuty of Loyalty & Disclosure

Section 299, Companies Act, 1956 principal is based on the rudiments of law that

the same person cannot act for himself/herself and at the same time, with respect to the same matter, act with another whose interests are conflicting

Effect of disclosure Disclosure to whom How extensive should the disclosure be

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Duty in Relation to Corporate OpportunityDuty in Relation to Corporate Opportunity

By occupying a position of trust, a director must not make a profit which he can acquire only by use of his position and, if he does, he must account for the profit so made.

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Corporate OpportunityCorporate Opportunity

Any profit made by a Director through holding the office of such director must be accounted for. Therefore, a Director would be held accountable for personal profits made from:–  The sale of goods, materials or services earlier dealt with by

Company for its business– Forestalling the company’s business opportunity unless the

company has rejected such opportunity– Requesting the customer to place orders for goods, materials and

services with another company in which he has some interest– Receiving Commission from another company,

which has sold goods to the company

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Liabilities of DirectorsLiabilities of Directors

Derivative ActionDerivative Action

Statutory LiabilityStatutory Liability

Contractual LiabilityContractual Liability

Tortuous LiabilityTortuous Liability

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Derivative ActionDerivative Action

Resolutions by directors for transferring the controlling interest of the company wherein there is a complete changeover of the structure to the detriment of the company

Sale of land to oneself at a discounted value Directors passing an ordinary resolution where

the act in question would require a special resolution

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Statutory LiabilityStatutory Liability

Companies Act, 1956: Officers in default Banking Regulation Act, 1949 Insurance Act, 1948 Pollution Laws Income Tax Act, 1961

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Director:Legal ProvisionsDirector:Legal Provisions

Restrictions on loans to directors or other specified entities (s. 295)– Interest rate shall not be less than 4% above prevailing bank rate

– Quantum of loan to not exceed 25 times the gross salary

– No default on public deposit by the company

Boards sanction for contracts in which directors are interested (s. 297)– Consent by way of board resolution

– Prior to the contract or within three months

– Except contract between two public companies

– Prior approval of the central government for a contract where the company has paid up share capital of not less than Rs 1 crore

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Director: Legal Provisions (Contd.)Director: Legal Provisions (Contd.) Disclosure of interest by directors (s. 299)

– Default ground for vacation under s. 283.

Interested directors not to participate or vote in board proceedings (s. 300)– Applicable only to public companies

Maintenance of records of contracts, companies, firms in which directors are interested (s. 301) – to be signed by all the directors present in the next board meeting– kept at registered office and available for inspection

Restriction on directors from holding office of profit (s. 314)– Company can give consent by special resolution– Does not apply to managing directors

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Issues for ConsiderationIssues for Consideration

Should the directors be educated on the risk profile of the company and their duties as a director?– Narayana Murthy Committee Report

Should there be codified duties and responsibilities?

Should the liability of the non-executive directors mirror the liability of the executive directors?

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Independent DirectorsIndependent Directors

No mention in the Companies Act Clause 49

- Optimum combination of executive and non-executive directors

- Not less that fifty per cent being non-executive

- If non executive chairman, at least one third of the board should comprise

of independent directors

- If executive chairman, at least half of the board should comprise of

independent directors Clause 63, Draft Companies Bill

– Every public company of prescribed paid up capital or turnover to have at least seven directors of which at least three or fifty percent, whichever is higher, to be independent directors» Would include unlisted public companies also

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Who is an Independent Director?

Independence of judgement

No material relationship

No pecuniary relationship

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What is Independence?What is Independence? The Cadbury Report defines independence as:

Apart from their directors’ fees and shareholdings, they should be independent of management and free from any business or other relationship which could materially interfere with the exercise of their independent judgement.

Clause 49‘Independent’ defined as those directors who, apart from receiving director’s remuneration do not have any other material pecuniary relationship or transactions with the company, its promoters, management or subsidiaries, which in the view of the board may affect independence of judgment

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What is Independence? (Contd.)What is Independence? (Contd.)

Clause 2(45), Draft Companies Bill

“Independent Director” means a non-executive director of a company who apart from receiving director’s remuneration, does not have any material pecuniary relationship or transactions of such amount as may be prescribed, with the company , its promoters, managing director, whole time director, other directors, manager or its holding company and its subsidiaries apart from possessing such attributes for being treated as Independent director as may be prescribed by the Central Government from time to time.

Excessively restrictive?

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Independent DirectorsIndependent Directors

External expert

Independent director: watchdog?

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Audit CommitteeAudit Committee

Clause 49, Listing Agreement– Minimum three members, all non-executive directors

– Majority independent, chairman independent

– At least one director having financial and accounting knowledge

– Must have at least three meetings per year

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Audit Committee (Contd.)Audit Committee (Contd.)

Section 292A, Companies Act– public companies– minimum three directors– two thirds other than managing or whole time directors

» no other qualifications prescribed– recommendations relating to financial management binding

» reasons for not accepting any recommendation– Auditors required to attend the meetings

Clause 62, Draft Companies Bill– not less than two independent directors

» no other qualifications prescribed

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Audit Committee (Contd.)Audit Committee (Contd.)

Proposed Clause 49 (pursuant to N.M. Report)– At least one member having financial and accounting

expertise– All members to be financially literate– Expanded role- independent judgment– Focusing on

» Quality of accounting policies» Alternate accounting policies» Internal control deficiencies

– Implementation of ‘whistleblower’ policy

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Audit Committee (Contd.)Audit Committee (Contd.)

Audit committees- Efficacy?

– Chairman of Enron’s audit committee was a Stanford professor with 30 years experience in auditing and accounts

– Should the members of audit committee be financially literate?

– Should the scope of audit committee be decided by the Board of Directors?

– Is remuneration of members an issue?

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Section VSection VAuditors: The Watchful EyeAuditors: The Watchful Eye

Appointment regulated by the Companies Act (s.224)– Maximum number of companies prescribed (20)

Qualifications & Disqualifications (s. 226)– Person holding any security of that company (2000

Amendment)

Requirement to report on specific matters (s. 227) ICAI Code of Conduct

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Section VSection VAuditors: The Watchful EyeAuditors: The Watchful Eye

Duties of Auditor– Duty of Care (Re Kingston Cotton Mills Co.)

» Reasonable care and skill– Auditor is the servant of the shareholder and

whose duty is to examine the affairs of the company on their behalf at the end of a year and to report to them what he has found.

– The auditor is like a trustee for shareholders. – Watchdog and not a bloodhound

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Auditor’s LiabilityAuditor’s Liability

Basis of Liability– Contractual and Fiduciary

» Company» Shareholders as a body

– Tortuous » “Holding out”

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Auditor’s Liability (Contd.)Auditor’s Liability (Contd.) Stage I (Upto 1963)

– Candler v. Crane» Privity doctrine: a third party not in privity with the auditor cannot recover

damages for negligence

» Justice Denning gave a dissenting judgment it must be known to the advise41r that the advice would be communicated to the

plaintiff in order to induce him to adopt a particular course of action the advice must be relied upon for the purpose of the particular transaction for

which it was known to the advisers that the advice was required.

Stage II (1964-1990)– Hedley Byrne & Co. v. Heller & Partners

» Liability for a negligent misstatement made by one person to another, even in the absence of any contractual or fiduciary relationship causing financial loss

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Caparo Industries Plc v. Dickman

Stage III (Post 1990)– Watered down in Caparo Industries case

» The three criteria for the imposition of a duty of care are foreseeability of damage proximity of relationship the reasonableness or otherwise of imposing a duty

» The auditor of a public company's accounts owed no duty

of care to a member of the public at large, who relied on

the accounts to buy shares in the company. An auditor owed no duty of care to an individual shareholder in the

company who wished to buy more shares in the company The purpose for which accounts are prepared and audited is to enable the

shareholders as a body to exercise informed control of the company

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Caparo Industries Plc v. DickmanCaparo Industries Plc v. Dickman Cadbury Committee on Caparo Industries

– the case exposed two widely held misconceptions:» audit report is a guarantee to the accuracy of the accounts,

and perhaps even as to the soundness of the company

» that anyone (including investors and creditors) can rely on the audit, not only in a general sense but also very specifically by being able to sue the auditors if they are negligent

In light of Enron is there a need to re-examine the issue of auditor’s liability as set out in the Caparo Industries case?

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Issues for ConsiderationIssues for Consideration

Should statute set out the liability?– Should ‘breach of care’ be extended to any other

group?

Whether rules for auditors liability need to be codified and made stricter?– Recommendations of Naresh Chandra Committee Report

Should Audit committees evaluate independence of auditors?

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Similarities between US position & Indian Similarities between US position & Indian ProposalsProposals

SOX CEO/CFO Certification Reimbursement for

misstatement Ban on loans to directors

Code of Conduct/Ethics Independent Board/

Committee Disclosure of Off Balance

Sheet/transactions that may have future impact

Narayana Murthy Committee CEO/CFO Certification Reimbursement for

misstatement Restriction on loan to

directors Written/Public Code of

Conduct Independent Board of

Directors More limited disclosures-

but left open for consideration

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Comparison between US & Indian PositionComparison between US & Indian Position

SOXAudit Partner Rotation

Audit Committee• Financial Literacy

• One financial expert

• Oversee auditor

• Approve related party transactions

• Whistleblowers policy

Narayana Murthy Committee

Audit Partner Rotation

Audit Committee• Financial Literacy

• One financial expert

• Oversee auditor

• Approve related party transactions

• Whistleblowers policy

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Proposed amendments to clause 49 and Draft Companies Bill address major issues– Appointment of a Chief Accounting Officer by a

Company

– Definition of related party transactions expanded and specific approval requirements introduced

– Disclosure of all contingent liabilities

– Timely communication of Risk Management activities

– CEO/ CFO certification requirements

Proposed AmendmentsProposed Amendments

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Section VISection VIReinventing Corporate Governance in Reinventing Corporate Governance in

IndiaIndia

Super regulator v. Multiple regulators?- Efficiency- Cost of Compliance

Transparency by the regulators? - Late trading and market timing investigations

Enforcement by stock exchanges?

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Reinventing Corporate Governance in Reinventing Corporate Governance in India (Contd.)India (Contd.)

Disclosure of voting agreements which impact governance of companies?

Pro-active role by institutional investors?

Mandatory Corporate Governance Ratings?

- Will it lead to better corporate governance?

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Reinventing Corporate Governance in Reinventing Corporate Governance in India (Contd.)India (Contd.)

How can whistle blowers be encouraged?

- Narayana Murthy Report

- Immunity for whistleblowers?

Directors & officers liability insurance?

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ConclusionConclusion

Good corporate governance – means to the end of sustainable wealth creation

The positive side of adherence to most rigorous standards in governance for corporations:

- Increased importance of corporate governance as an investment criteria among large investors

- Improved Equity Price Performance

- Higher Valuations

- Access to global markets

- Increased investor goodwill & confidence

Balance between ‘enterprise’ and ‘constraints’

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Internal AuditInternal Audit• CARO RequirementCARO Requirement• As per Sarbanes Oxley Act, 2002As per Sarbanes Oxley Act, 2002• Clause 49 of Listing AgreementClause 49 of Listing Agreement• SAS 70 ReportSAS 70 Report

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Internal AuditInternal Audit• CARO RequirementCARO Requirement

Requirement of CARO – Auditor’s comment on Requirement of CARO – Auditor’s comment on internal auditinternal audit

• Clause 49 of Listing AgreementClause 49 of Listing Agreement

- A- Applicable to listed companies in Indian Stock pplicable to listed companies in Indian Stock Exchange.Exchange.

• SAS 70 ReportSAS 70 Report

- Use of Service Organizations like payroll - Hewitt, - Use of Service Organizations like payroll - Hewitt, MF accounting – Syntel Outsourcing, etcMF accounting – Syntel Outsourcing, etc

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Internal AuditInternal AuditSarbanes Oxley Act, 2002Sarbanes Oxley Act, 2002• Applies to all companies listed in SECApplies to all companies listed in SEC• US based company and its subsidiaries, foreign US based company and its subsidiaries, foreign

companies like Patni, TATA Motors ADR companies like Patni, TATA Motors ADR listed in NYSC.listed in NYSC.

• Sec 404 – Internal control on Financial Sec 404 – Internal control on Financial ReportingReporting

• Certification by CEO/CFO on quarterly basis.Certification by CEO/CFO on quarterly basis.

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Internal AuditInternal AuditSarbanes Oxley Act, 2002Sarbanes Oxley Act, 2002

Senator Paul SarbanesSenator Paul SarbanesMike Oxley

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End in Mind…End in Mind… a statement a statement acknowledging your responsibility acknowledging your responsibility for establishing and maintaining for establishing and maintaining

adequate “internal control over financial reporting“adequate “internal control over financial reporting“ a statement a statement identifying the internal control framework identifying the internal control framework you used to conduct your you used to conduct your

evaluation of the effectiveness of internal control over financial reporting evaluation of the effectiveness of internal control over financial reporting an an assessment of the effectiveness assessment of the effectiveness of your company's internal control over financialof your company's internal control over financial

reportingreporting as of the end of your most recent fiscal year. as of the end of your most recent fiscal year.

– Assertion: Assertion: a statement as to whether or not your company's internal control over a statement as to whether or not your company's internal control over financial reporting is effectivefinancial reporting is effective

disclosure of any “material weaknesses“disclosure of any “material weaknesses“ in your company's internal control over in your company's internal control over financial reporting. financial reporting.

– If there are any disclosed material weaknesses, then you are not permitted to If there are any disclosed material weaknesses, then you are not permitted to conclude that your internal control over financial reporting is effectiveconclude that your internal control over financial reporting is effective

a statement that your a statement that your independent auditors have issued a reportindependent auditors have issued a report on your assessment of on your assessment of internal control over financial reportinginternal control over financial reporting

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How to be there..,How to be there..,

Financial Controls must be suitably designed using established criteria Financial Controls must be suitably designed using established criteria (COSO)(COSO)

·   Control objectives and related financial controls are appropriately ·   Control objectives and related financial controls are appropriately documenteddocumented

·   Documentation is auditable·   Documentation is auditable

·   Key financial controls are identified (Assertions)·   Key financial controls are identified (Assertions)

·   Management perform the own tests of:·   Management perform the own tests of:

• the design of controls over financial reportingthe design of controls over financial reporting

• the effectiveness based on key financial controlsthe effectiveness based on key financial controls

·   Deficiencies are documented, disclosed and addressed.·   Deficiencies are documented, disclosed and addressed.

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Applying the COSO Applying the COSO FrameworkFramework

Control Environment Sets tone of organization-

influencing control consciousness of its people.

Factors include integrity, ethical values, competence, authority, responsibility.

Foundation for all other components of control.

Risk Assessment Risk assessment is the

identification and analysis of relevant risks to achieving the entity’s objectives – forming the basis for determining control activities.

Monitoring Assessment of a control

system’s performance over time.

Combination of ongoing and separate evaluation.

Management and supervisory activities.

Internal audit activities.

Control Activities Policies/procedures that

ensure management directives are carried out.

Range of activities including approvals, authorizations, verifications, recommendations, performance reviews, asset security and segregation of duties.

Information & Communication

Pertinent information identified, captured and communicated in a timely manner.

Access to internal and externally generated information.

Flow of information that allows for successful control actions from instructions on responsibilities to summary of findings for management action.

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ControlsControls

Preventative and Detective ControlsPreventative and Detective Controls

Manual and Automated ControlsManual and Automated Controls

Business Performance Review / Monitoring Controls Business Performance Review / Monitoring Controls

General Computer Controls (IT Level Controls)General Computer Controls (IT Level Controls)

Application Controls (Transaction Level Controls in Application Controls (Transaction Level Controls in Computer System)Computer System)

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Control objectives for Transaction Control objectives for Transaction ProcessingProcessing

Completeness of records (C) - controls over completeness are designed to ensure Completeness of records (C) - controls over completeness are designed to ensure that:that:– All transactions are recorded once and only once.All transactions are recorded once and only once.– All transactions are recorded in the correct period and in the correct legal entity.All transactions are recorded in the correct period and in the correct legal entity.

Accuracy of records (A) - controls over accuracy are designed to ensure that:Accuracy of records (A) - controls over accuracy are designed to ensure that:– All transactions are accurately recorded in the general ledger, including correct All transactions are accurately recorded in the general ledger, including correct

classification to ensure compliance with disclosure requirements.classification to ensure compliance with disclosure requirements.– Assets and liabilities are recorded at an appropriate value.Assets and liabilities are recorded at an appropriate value.– Changes to standing data are accurately input.Changes to standing data are accurately input.

Validity of records (V) - controls over validity are designed to ensure that:Validity of records (V) - controls over validity are designed to ensure that:– Transactions are authorized.Transactions are authorized.– Transactions are genuine and they relate to Company.Transactions are genuine and they relate to Company.– Changes to standing data are authorized.Changes to standing data are authorized.

Restricted access to assets and records (R) - controls to restricted access are Restricted access to assets and records (R) - controls to restricted access are designed to ensure that:designed to ensure that:– There is appropriate segregation of duties with respect to key controls.There is appropriate segregation of duties with respect to key controls.– Physical assets (e.g. gold bullion) are appropriately safeguarded.Physical assets (e.g. gold bullion) are appropriately safeguarded.

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Financial Reporting - AssertionsFinancial Reporting - Assertions Existence or OccurrenceExistence or Occurrence

– Assets or liability exist at a given date (FG)Assets or liability exist at a given date (FG)– Transaction occurred during a given period (Sales)Transaction occurred during a given period (Sales)

CompletenessCompleteness– All financial transactions are included for reporting (Purchases)All financial transactions are included for reporting (Purchases)

Valuation or AllocationValuation or Allocation– All amounts represented at appropriate amount (Accounts receivable)All amounts represented at appropriate amount (Accounts receivable)

Rights and ObligationsRights and Obligations– Assets and Liabilities represents rights and obligations (Lease capitalized)Assets and Liabilities represents rights and obligations (Lease capitalized)

Presentation & DisclosurePresentation & Disclosure– Properly classified and disclosed (Long term liabilities)Properly classified and disclosed (Long term liabilities)

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Documentation standardsDocumentation standards

Management must document the design of controls related to all Management must document the design of controls related to all relevant assertions for all significant financial statement accountsrelevant assertions for all significant financial statement accounts

Documentation must encompass the entire process of:Documentation must encompass the entire process of:

– initiatinginitiating

– authorisingauthorising

– recordingrecording

– processingprocessing

– reporting individual transactionsreporting individual transactions The required documentation might take various forms: flowcharts, The required documentation might take various forms: flowcharts,

policy manuals, accounting manuals, narrative memoranda, decision policy manuals, accounting manuals, narrative memoranda, decision tables, procedural write-ups or completed questionnairestables, procedural write-ups or completed questionnaires

Flowcharts, supplemented by narrative descriptions, are frequently the Flowcharts, supplemented by narrative descriptions, are frequently the most effective form of control documentationmost effective form of control documentation

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Confirms that the documentation prepared by the company Confirms that the documentation prepared by the company reflects its reflects its actualactual processes processes

Confirm that controls described in the documentation are Confirm that controls described in the documentation are actually those applied “in the field”actually those applied “in the field”

Confirm that, Confirm that, at leastat least, all key controls have been , all key controls have been documented appropriately (completeness of the process documented appropriately (completeness of the process documented)documented)

Objectives of a walkthroughObjectives of a walkthrough

Walkthroughs should confirm that the documentation is appropriate

to develop the testing plan

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Gaps in ControlsGaps in Controls Processes not adequately documented (scope and quality)Processes not adequately documented (scope and quality)

Controls not implementedControls not implemented

Controls poorly designedControls poorly designed

Controls not working effectivelyControls not working effectively

Control-related roles not assignedControl-related roles not assigned

Non-existence of policiesNon-existence of policies

Gaps identified during documentation process – Will be shared on Gaps identified during documentation process – Will be shared on confirmation during walk-through processconfirmation during walk-through process

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Process identified for documentationProcess identified for documentation

Purchase of Materials and Accounts PayablePurchase of Materials and Accounts Payable Production AccountingProduction Accounting Stock AccountingStock Accounting Sales Accounting and Accounts ReceivablesSales Accounting and Accounts Receivables Treasury and Banking TransactionsTreasury and Banking Transactions General AccountingGeneral Accounting Fixed AssetsFixed Assets

ScopeScopeScopeScope

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Master maintenance – BOM & SuppliersMaster maintenance – BOM & Suppliers Issue of purchase ordersIssue of purchase orders ReceivablesReceivables GAR and Inventory VerificationGAR and Inventory Verification Raising debit notes on creditors Raising debit notes on creditors Accounting for creditorsAccounting for creditors Payment processingPayment processing

Purchase of Materials and Accounts Purchase of Materials and Accounts PayablePayable

Purchase of Materials and Accounts Purchase of Materials and Accounts PayablePayable

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Material IssuesMaterial Issues Production accounting – back flashingProduction accounting – back flashing Costing and standard updationCosting and standard updation

Production AccountingProduction AccountingProduction AccountingProduction Accounting

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Physical VerificationPhysical Verification Stock valuationStock valuation 3P Management3P Management

Stock AccountingStock AccountingStock AccountingStock Accounting

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Master maintenance Master maintenance Receiving and accepting sales ordersReceiving and accepting sales orders Dispatching Dispatching Accounting sales and debtors Accounting sales and debtors Provision for debtorsProvision for debtors

Sales Accounting to ReceivablesSales Accounting to Receivables Sales Accounting to ReceivablesSales Accounting to Receivables

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Payment and receipt of moneyPayment and receipt of money Schedule of authoritySchedule of authority Banking of receiptsBanking of receipts Accounting for FOREX conversion and forward coversAccounting for FOREX conversion and forward covers Export Packing credit managementExport Packing credit management Bank Recos.Bank Recos.

Treasury and banking transactions Treasury and banking transactions Treasury and banking transactions Treasury and banking transactions

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IUT’sIUT’s Cut offs and period end/ consolidationCut offs and period end/ consolidation Journal entriesJournal entries Restructuring provisions Restructuring provisions

General Accounting General Accounting General Accounting General Accounting

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Capital Proposal approval and capital advances accountingCapital Proposal approval and capital advances accounting Receiving and accounting for capital WIPReceiving and accounting for capital WIP Additions to FA and deletion from FAAdditions to FA and deletion from FA Depreciation AccountingDepreciation Accounting Impairment provisionsImpairment provisions Physical verificationPhysical verification

Fixed AssetsFixed AssetsFixed AssetsFixed Assets

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Presented By Presented By

CA Swatantra Singh, B.Com , FCA, MBA CA Swatantra Singh, B.Com , FCA, MBA Email ID: Email ID: singh.swatantra@gmail.com New Delhi , 9811322785,New Delhi , 9811322785, www.caindelhiindia.com, www.caindelhiindia.com, www.carajput.comwww.carajput.com

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