By CA Rashmi Khetrapal Member of NIRC of ICAI AARMPeSERVE Pvt. Ltd. Contact : +91 9810101449 Corporate Governance vis-a-vis Statutory Compliance.

By CA Rashmi KhetrapalMember of NIRC of ICAIAARMPeSERVE Pvt. Ltd. www.aarmp.comContact : +91 9810101449

Corporate Governance vis-a-vis Statutory Compliance

Corporate Governance

Corporate governance is a term that refers broadly to the rules, processes, or laws by which businesses are operated, regulated, and controlled. The term can refer to internal factors defined by the officers, stockholders or constitution of a corporation, as well as to external forces such as consumer groups, clients, and government regulations.

Statutory Compliance

Statutory means "of or related to statutes," or what we normally call laws or regulations. Compliance just means to comply with or adhere to. So statutory compliance means following the laws of land..

India has a well developed tax structure with a three-tier federal structure, comprising the Union Government, the State Government and Urban/Rural Local Bodies. The power to levy taxes and duties is distributed among the three tiers of governments, in accordance with the provisions of the Indian Constitution:

Union Government is primarily responsible for imposing taxes on :

Income, Custom Duties, Central Excise Service Tax.

State Government is responsible for levying taxes like

State Excise,

Stamp Duty,

VAT (Value Added Tax),

Land Revenue

Professional Tax.

The local bodies are also authorized to impose tax on

Properties,

Octroi and many more.

• ROC

• SEBI Disclosures

A well-defined and enforced statutory compliance provides a structure that works for the benefit of everyone concerned by ensuring that the enterprise adheres to accepted ethical standards and best practices as well as to formal laws. Thus thereby ensuring best corporate governance for the organization.

In recent years, corporate governance has received increased attention because of high-profile scandals involving abuse of corporate power and, in some cases, alleged criminal activity by corporate officers. An integral part of an effective corporate governance regime includes provisions for civil or criminal prosecution of individuals who conduct unethical or illegal acts in the name of the enterprise.

Occupational Fraud

• Failure to comply with the statutory compliances where on one hand weakens the governance in the company on the other hand increases the risk of occupational/internal fraud.

• Occupational Fraud refers to the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.

Some Fraud Facts and Figures

• A typical organization loses 7% of its annual revenue to fraud and abuse•Fraudulent billing accounts for 24% of occupational fraud cases with the fraud going undetected for a median length of time of 24 months ACFE 2008 Report to the Nation on Occupational Fraud and Abuse

•Fraud by individuals within companies was widespread with lower level employees accounting for more fraud than managers (£94m across 26 cases compared with £63m across 20 cases by managers)•A Finance Manager at a charity cashed donation cheques and took the money himself, creating a trail of false invoices to cover his tracks A survey of fraud cases in UK Courts

Some Fraud Facts and Figures—contd…

• According to the association's report, more than 80 percent of occupational frauds involve asset misappropriations, with cash being the targeted asset 90 percent of the time.

• Corruption schemes account for 13 percent of all occupational frauds and cause, on average, more than $500,000 in losses annually.

• Fraudulent statements are the most costly form of occupational fraud, with median losses of $4.25 million per scheme.

• Report findings reveal that the average scheme in a small business results in $127,500 in losses, whereas the average fraud in the largest companies costs $97,000.

• The majority of frauds (64%) are committed by employees.

• But frauds committed by managers or executives are three-and-a-half times more costly than frauds committed by employees, because the higher employees rise in an organization, the more they are entrusted with company assets.

• Males accounted for losses that were three times greater than those of females—although the frequency of incidents was roughly the same

• Only about 7% of fraudsters had been convicted of a previous crime

• Approximately 33% of reported frauds involved two or more individuals

• In cases involving collusion, the median loss was six times greater than the median loss when only one person committed the fraud

• The oldest fraudsters (over 60) caused median losses 27 times greater than those of the youngest fraudsters (below 25)

Different Types of Fraud:

• Asset Misappropriations,

• Corruption, and

• Fraudulent Statements

Procurement Flow

Statement of Requirement

Procurement Plan

Supplier Identification

Adjudication

Vendor Pre-evaluation

& selection

Vendor Registration

NDA/ ITT/ RFP Sign Off call

Recommend

Submit Procurement

Case

Contract Award

RFI

Procurement Plan

Negotiation/e Auction

Shortlist for e Auction

Purchase Order

Purchase Requisition

Invoice Approval& Pay

PerformanceManagement

Catalogue

Sourcing Purchase

How to Control – Overview

Good Procurement Governance

Controlling People Factor

Using Technology for Transparency &

Reporting

Procurement/Supplier

Audits

UtilizingGeography

1

3

4

5

2

Accepting ,Gift & Hospitality, upto certain Value, Should be declared and recorded Gift & Hospitality

Example of Procurement Governance

Implementation of the Governance across the Globe Demographics

Training Training to Buyers and Suppliers

Ensuring the mendatory documents are released to The Supplier During ITT, and Maintaining Audit Trail

Documentation

3 Way MatchingOf Invoices

Invoices should be paid after matching with the PO,Receipt of the Goods/Services, and Payment Terms

3-4 WaySign Off

For High Value Procurement, 3 way Sign Off (Operational, Financial & Central Procurement)

Conflict of Interest must be declared Conflict of Interest

Good corporate governance involves a commitment of a company to run its

businesses in a legal, ethical and transparent manner - a dedication that must come

from the very top and permeate throughout the organization. That being so, much of

what constitutes good corporate governance has to be voluntary. Law and

regulations can, at best, define the basic framework - boundary conditions that

cannot be crossed.

For Example,• The Board of Directors

o Non-executive and independent directors

o Committees of the board

o Significant related party transactions

• Auditors

o Independence of Auditors

o Rotation of Audit Partners

• Regulatory Agencies

o Legal and regulatory standards

o Effective and credible enforcement

• External Institutions

o Institutional investors

o The Press

Q & A……