AB & CD Limited, a Non-Banking Finance Company (NBFC), was a diversified Company having a complex group structure with more than 20 subsidiaries. Each company had its own Finance department which would report to a Ce

CS Professional · Multidisciplinary Case Studies · PYQS · December 2019
AB & CD Limited, a Non-Banking Finance Company (NBFC), was a diversified Company having a complex group structure with more than 20 subsidiaries. Each company had its own Finance department which would report to a Central Finance Team headed by the group CFO. All the Companies and different units of AB & CD Limited were functioning in silos, wherein each one was unaware of the performance of other companies. There were inter-corporate loan arrangements between Companies in the group. The top management consisted of few professionals and family members. All the top executives were being paid higher remuneration in comparison with the industry benchmarks including high number of stock options. AB & CD Limited had a whistle blower policy monitored by the Audit Committee. Vyom, a qualified Senior Accountant, working in the Company had approached the Director (Finance) with concerns about the financial statements but he could not get satisfactory answers and so threatened to inform the press. When his threat came to the attention of the Board, he was intimidated to keep quiet. Another employee had written to an independent director stating that the books of the Company had been manipulated. Although this letter was circulated to the Board, no action was taken. The audit committee also failed to take any action. When the group was not able to repay its loan to banks, there were concerns from bank and forensic audit was initiated. The forensic audit revealed a fraud within the Company and the share price of the Company plummeted. What is the role of Independent Directors and Audit Committee for effective oversight of matters pertaining to Whistle blower complaints?

Answer & Explanation:

While the ultimate responsibility of vigil mechanism is with the Board as a whole. Audit Committee is tasked with principal oversight of whistle blowing systems with the direct responsibility for anti-fraud efforts generally residing with management including internal audit. Whistle blowing procedures are a major line of defence against fraud and audit committee should ensure such procedures are effective. By focusing on whistle blowing channels and considering it within the context of the organisations overall approach to enterprise risk management the audit committee can help strengthen internal controls, financial reporting and corporate governance. The audit committee must be properly informed and actively engaged in overseeing the process while avoiding taking on the role or responsibilities of the Management. To this end, it should seek input from legal counsel, internal/external audit. The audit committee should seek to ensure that the management has considered all risks that are likely to have a significant financial, reputational or regulatory impact on the organization. For any such risks, a rigorous assessment of the relevant internal controls including their ability to detect and prevent fraud should be made. Effective monitoring of these internal controls and periodic re-assessments of their effectiveness are key elements to stay updated, together with management's active engagement in the process. The audit committee should consider whether effective fraud awareness programmes are in place, updated as appropriate and effectively communicated to all employees.

Topics: Corporate Governance

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