Black money, used to grease the palms of the powerful, cannot be raised by companies without the active support of the CFO.
As the resentment against “corruption” assumes unprecedented proportions, with unelected heroes of “civil society” a la Anna Hazare and Baba Ramdev at the helm, it is also important to take stock of corrupt practices in the corporate world. After all, the government is not the sole repository of corrupt practices.
Those who corrupt the politicians and bureaucracy are large public companies in the private sector, who offer illegal gains to get national assets at the least possible value. The trigger and beneficiary is the private sector, which having disproportionately gained, throws a few crumbs at the facilitators.

INDEPENDENT DIRECTORS

How do corporates indulge in such large-scale fraud? The answer lies in the quality of the promoters, their ethics, culture, composition of the board of directors, and the value system of the executives, most importantly, of the managing director and the chief financial officer.
Although the Securities and Exchange Board of India (SEBI) has initiated a number of measures, collectively embodied as “corporate governance” for transparent and proper functioning of listed companies, compliance of those measures remains mostly on paper.
For example, SEBI has prescribed that half the composition of the board, where the Chairman is an Executive Chairman, and one-third, where the Chairman is non-executive, should comprise independent directors. Unfortunately, independent directors in many cases are beholden to the promoters, and function as rubber stamps who hardly speak at the Board meetings. In fact, some of them are also authorised to execute transaction documents, on behalf of the company, because they will sign across the dotted line without demur.
There are also instances of promoter directors exercising executive powers without being an executive director, appointed as per law, which is a gross violation of the Companies Act and punishable with imprisonment.

CFO'S IMPACT

Then comes the lynchpin of the system, the chief financial officer (CFO) of the company. No significant commercial transaction in a company can happen without the knowledge, co-operation and support of the CFO. If the CFO has a will of iron, which cannot be bent by the loaves of office, a company can do wrong.
Even if the CFO cannot completely resist an illegal transaction, but expresses his reservations repeatedly, it may help reduce the occurrence of wrongdoing. In all fairness to the CFO, it must be said that unlike in the case of civil servants, he runs the risk of losing his job. But what is there in a job, if you cannot hold your head high? One or two CFOs may lose their job, but it cannot be an unending story, and soon the promoter may begin to feel embarrassed.
Promoters are generous to CFOs who help them siphon funds through associate company transactions, strip the assets of the company at prices far removed from the market price, thereby unduly enriching the private promoters, at the cost of shareholders and the public at large.
Black money, that is, unaccounted money, cannot be raised by companies without the active support of the CFO, and it is such unaccounted money that is used to grease the unholy palms of the powers-that-be. Where does the auditor stand in relation to these corporate frauds?

THE AUDITOR'S ROLE

The poor auditor does not audit the accounts in detail, as is commonly believed or expected. The text of the auditor's report to the shareholders is standardised and clearly states that the ‘financial statements are the responsibility of the company's management… An audit includes assessing on a test basis, evidence supporting the amounts and the disclosures in the financial statements.....in our opinion, proper books of account, as required by law, have been kept by the company so far, as it appears from our examination of those books'.
Thus, auditor does only test checks, and evaluates the overall presentation of the financial statements based on those test checks and the explanations given by the company. With such stated limited responsibility, how is it possible for any auditor to detect malpractices, if these are skilfully hidden by the management?
The Ministry of Company Affairs, on a selective basis, does order and conduct inspection and scrutiny of the books of accounts of companies, but such inspections are largely of a technical nature, relating to proper and timely filing of the prescribed statutory returns.
It would do enormous good to the shareholders, and for maintaining probity in corporate management, if the Ministry of Corporate Affairs were to identify large companies controlled by private promoters, conduct an intensive check of its books of accounts, voucher by voucher, to ensure that all receipts and payments are made in accordance with law.
Particular focus should be on transactions with companies in which promoters are interested, because there's always a suspicion of siphoning of money from public companies to associate private companies, in which promoters have a greater stake.
In the absence of intensive scrutiny, corporate money bags will virtually run and ruin the country....................
- Umesh Shanmugam