Cos need to strengthen internal control safeguards to prevent corporate frauds: Study

New Delhi, Sep 8 (PTI) Around 89 per cent of independent directors surveyed believe that the health of internal controls is not as robust as they are reported in company annual reports, according to a study.

The study, conducted by CII, Protiviti Member Firm for India and NFCG on Independent Directors (IDs), brings to the fore an in-depth perspective on questions relating to the adequacy of internal controls and governance frameworks in companies.

It is based on interviews with 100 Independent Directors participating from companies across industries, including multinational corporations, Indian conglomerates, and other businesses.

Annual reports of 150 companies were examined for two consecutive financial years, focusing on types and instances of disclosure around IFC by the directors and the auditors.

Puneet Gupta, Managing Director, Protiviti Member Firm said internal Financial Controls form the bedrock for ensuring good corporate governance, preventing fraud and financial reporting irregularities.

"It has been observed while shaping the study report that 89 per cent of the IDs believe that health of Internal Controls is not as robust as they are reported in company annual reports.

Elaborating on the way forward, he added, “Companies will need to focus effectively on critical areas that include strengthening of internal controls, risk and governance framework, clear segregation of responsibility between Key Management Personnel, Executive Directors and IDs, and ensuring board diversity in terms of both industry and functional expertise.” As per the study, 70 per cent of the IDs interviewed believe that the legal action against the community has been extreme and over 80 per cent said that there are insufficient legal safeguards to protect them from unfair persecution and reputational damage, compelling many IDs to seek advisory position in companies instead of board positions.

This could result in a parallel corporate governance structure, and smaller or newer companies may not be able to attract high-quality directors, it found.

The study highlighted that 52 per cent IDs believe that Auditors do not provide adequate inputs and there is a need for improvement in the way they discharge their role. Key risks and controls related to several important areas like operational controls, cyber and data security, fraud, investment risks are not getting adequate importance.

As per 60 per cent of IDs, the roles and responsibilities as defined by the Companies Act are unreasonable and onerous.

The role of IDs is becoming increasingly crucial as they guide the management on best practices and fair standards that can be imbibed by organisations. However, performing these duties comes with their own set of impediments for IDs and they need the support of the Management to overcome them. PTI RSN MR MR