Sebi mulls external agency to keep tab on internal auditors

In the wake of rising cases of embezzlement in corporate accounting, the Securities and Exchange Board of India (Sebi) is weighing the option of mandating companies to appoint external agencies to monitor their internal auditors.

The market regulator today said that it was examining the need to tweak existing regulations in order to avoid any more breach of corporate governance laws in future.

Addressing a seminar on corporate governance, organised by the Confederation of Indian Industries (CII), Sebi Chairman C B Bhave said the regulator’s investigation was trying to find out if there was any systemic problem that might have led to the fiasco at Satyam Computer Services, India’s fourth-largest IT and software services firm.

The Sebi chief said the Satyam fiasco had raised several questions on corporate governance and the market regulator was examining if internal auditors should report directly to their boards rather than to their chief financial officers (CFOs). The regulator was also mulling the option of rotating the role of auditors of a company to ensure more transparency in financial accounting, he said, adding that a consultative paper on this would be released shortly.

According to Bhave, Sebi was also examining the role of independent directors in companies’ internal audits and possibilities of giving more rights to large non-promoter shareholders in audit committee selections.

In order to implement peer-review mechanism, Bhave said, “We are examining the working papers of all listed companies and, based on that, we will determine whether we need to overhaul the system.”

Commenting on the Satyam fraud, he said, “We need to find out the culprits and bring them to justice… Any incident like Satyam results in changes in laws and governance, and we need to see how fast we tackle such issues. Without taking any hasty step, we have to strike a balance between regulatory interventions and growth of corporate India.”

Explaining Sebi actions in the Satyam scandal, Bhave said the new board (of Satyam) that was formed in just two days had started the process of re-stating the accounts and would come out with results shortly.

“While the initial response of the regulators to the Satyam case has been prompt, we need to ensure that the investigation is carried out with speed and efficiency in the medium term,” Bhave said.

On the Sebi concept of having an external agency to monitor the operations of company auditors, Tata Sons Director J J Irani felt that such an agency should be appointed only if the independent directors of a company questioned the transparency of internal auditors.

Some industry experts also disagreed even on the Sebi proposal for rotating the role of auditors in a company. “Rotation of auditors is not appropriate as it may not guarantee that a newly-appointed team of auditors will not fail to comply with the required governance standards. We may look at introducing supervision on all auditors in India through a registration process,” said P R Ramesh, National Director, Audit and Enterprise Risk Services, Deloitte Haskins & Sells.

“Rotation of auditors does not solve the problem of frauds in audit committees, and we do not fully support the concept of hiring external agencies to audit the auditors. The solution to this problem is bringing in regulatory enforcements and appropriately punish errant auditors,” said ICRA Vice-Chairman and Group CEO P K Choudhury.