Companies Act 2013 Push To Corporate Governance

Corporate Governance
Part - 3
By Prof Arun Kumar Agarwal, ACA, ACS

IBS, Gurgaon
The Year of the “Perfect Storm” 2002
Unethical Corporate Behavior

Fraudulent Scandals – ENRON CASE
Downturn in the US Economy – Post 9 / 11
Massive Business Failures
Audit Failures
Election Year in US
The result:
The most significant legislation affecting the accounting profession
since 1934 – The enactment of the Sarbanes Oxley Act, 2002
Sarbanes-Oxley Act of 2002
The Sarbanes Oxley Act brought in the following stringent measures to

check frauds and manipulations in the US:
i. It created the Public Company Accounting Oversight Board or PCAOB,
funded by accounting firms and registrants
ii. Revised corporate governance standards
iii. Added new disclosure requirements
iv. Created new federal crimes related to fraud
v. Significantly increased criminal penalties for violations of the securities
laws
Some of the other key provisions of the Sarbanes Oxley Act are as
under:
• To promote Auditor Independence
– Prohibits accounting firms from performing certain non-audit
services for audit clients
• Auditor Partner Rotation

– Requires audit partner and review partner rotation every 5 years.
This means that the same partner of the CPA firm cannot audit &
review beyond 5 years.
• Requires a 1-year cooling off period

– Audit firm cannot perform audit if CEO, CFO, controller, chief
accounting officer, etc. was employed by and participated in the
audit 1-year prior to the start of the audit
The Corporate Governance Standards introduced by the Sarbanes Oxley Act

provided for the following measures to improve the Corporate Governance
Standards in industry.
– Audit committees must approve all services to be provided by the
accounting firm;
– audit committee were required to maintain effective and close
communications with the auditor;
– Mandatory adoption of “code of ethics” for senior financial officers
– The CEO and CFO to certify financial reports
– Prohibits most directors and officer from obtaining loans from the
company
– New rules were laid down on directors and officers trading in
company stocks (insider trading)
– Requires attorney whistle blowing
Implications of Sarbanes-Oxley For India
• In India with the coming of the Companies Act, 2013 the key elements of
Sarbanes Oxley Act have been introduced with focus of improving
corporate governance standards, intensifying stringent punishments for
violations and making the key managerial personnel accountable apart
from enlarging the role of audit committees.
Corporate Governance initiatives in India
The need for strengthening standards of Corporate Governance was recognized by

the legislators and in the Companies Act, 2013 for the first time this issue was
addressed in the following manner:
1. The term “key managerial personnel” was defined and accountability of
management was fixed in clear and concise manner.
2. The concept of a minimum and a maximum penalty was introduced for every area
of violation with both financial fine and an imprisonment term.
3. The value of monetary fines under the new Companies Act has been significantly
increased against petty fines in the earlier company law.
4. For the first time the role of independent directors was clarified and no longer
were such directors excused from their accountability in respect of “Board”
decisions on the pretext that they did not attend a Board meeting or vote on a
resolution. It has now become mandatory for a director to expressly have his non
consent to a resolution recorded in the Board Meeting Minutes whether he
attends the meeting or not.
Corporate Governance initiatives in India
5. For the first time in the history of corporate India, a provision was introduced for
the refund of remuneration by the managerial personnel for frauds and
negligence by them resulting in the restatement of financial statements.
6. For the first time, the provisions of the Companies Act relating to elements of
good management were made applicable to private companies also which were
earlier applicable only to public companies.
The above are some of the key features of the new Companies Act, 2013 which is a
major step forward in improving corporate governance in the corporate sector.
Thank You…

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Companies Act 2013 Push To Corporate Governance

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Corporate Governance

By Prof Arun Kumar Agarwal, ACA, ACS

Unethical Corporate Behavior

The Sarbanes Oxley Act brought in the following stringent measures to

• Auditor Partner Rotation

• Requires a 1-year cooling off period

The Corporate Governance Standards introduced by the Sarbanes Oxley Act

The need for strengthening standards of Corporate Governance was recognized by

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