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 are the challenges of effective implementation of a Whistle blower policy in a company such as AB & CD Limited? Give your suggestion for devising better Whistle blower mechanism.

Answer & Explanation:

Some of the challenges of effective implementation of a whistle blower policy are: Operational: Extent of whistle blowing mechanism within the organization, awareness about it to staff members and whether the hotlines and reporting lines actually work. Emotional and cultural: Whistle blowers are commonly viewed as snitches, sneaks, grasses and gossips. This perception can make it difficult to blow the whistle even though individuals recognize that it is good for the company, employees, shareholders and other stakeholders. Potential whistle blowers often fear reporting incidents to Management: Areas such as legal protection, fear of trouble and potential dismissal all play a part when an individual is considering whistle blowing. Suggestions for devising better whistle blower mechanism: Whistle blowing policies and procedures to be documented and communicated across the organization. Whistle blowing policy should ensure that it is both safe and acceptable for employees to raise concerns about wrongdoing. The whistle blowing procedures should be arrived at through a consultative process. Management and employees should 'buy into' the process. Success stories to be publicized. Concerns raised by employees are responded to within a reasonable time frame. Procedures should be in place to ensure that all reasonable steps are taken to prevent the victimization of whistle blowers and to keep the identity of whistle blowers confidential. Dedicated person to be identified to whom confidential concerns can be disclosed. That person should have the authority and statute to act if concerns are not raised with or properly dealt with, by the line management and other responsible individuals. Management should understand how to act if a concern is raised. They should understand that employees and others have right to blow the whistle. Consideration to be given to the use of an independent advice centre as part of the whistle blowing procedures. In case, issues are not reported to the management through whistle blowing channel, then management must have a relook on the effectiveness of the whistle blowing procedures.

Topics: Corporate Governance

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