Home / Companies / Ratifying appointment of auditors at AGMs should continue: panel

New Delhi: A parliamentary panel on finance looking into the proposed Companies Bill 2011 has recommended that the practice of ratifying the appointment of company auditors every time an annual general meeting (AGM) of the company is convened, should be continued, disregarding the view taken by the corporate affairs ministry, which wants such appointments frozen for a five-year period.

A file photo of Yashwant Sinha

The Companies Bill, which is awaiting parliamentary approval, allows auditors to be appointed for a five-year period.

Once passed, it will do away with the Companies Act of 1956, which currently governs company affairs in India.

“The committee believes that the well-established principle of shareholders’ democracy, represented by the annual general meeting of company should be preserved, while seeking to provide stability of tenure to auditors," the panel said in its report.

Following the Satyam scam in 2008, the government had issued a non-mandatory guideline to rotate auditors every six years, said Shriram Subramanian, founder and managing director of activist investor advisory firm InGovern Research Services Pvt. Ltd.

“In the US, audit partners are required to be rotated every three years, even though the audit firm can remain the same. This practice itself has generated much debate there," he said.

The panel also wants the new Bill to incorporate norms for stricter financial disclosures for government-owned companies.

It wants disclosure provisions included in the reports of the boards of directors of government-owned companies by which they would have to indicate the impact and implications of government directives on their financial positions.

This recommendation is based on a suggestion made by the Comptroller and Auditor General (CAG), the principal auditor for all government-owned entities and companies. “Although the ministry of corporate affairs as well as the department of public enterprises have not agreed with this suggestion, the committee are of the view that suggestion of CAG is worth considering in the interest of functional autonomy and operational efficiency of PSUs (public sector undertakings). It will also help minimize government interference in the management of PSUs," the panel report notes.

Another recommendation by the panel related to the position of whole-time directors of companies within the definition of so-called “key managerial personnel" (KMPs).

The corporate affairs ministry had said that if a company has a managing director, whole-time directors should not be brought within the purview of KMPs.

“The committee, while disagreeing with the ministry’s view, would like to reiterate their earlier recommendation, as whole-time directors, being important in a company, with substantial role in decision making, cannot be kept outside the purview of KMPs," the report said.


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