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You Think - March 2009

CFO Update

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In the aftermath of the Satyam Fiasco, many companies have seen an upheaval in their business plans & strategies. Corporate governance and compliance norms have come under the microscope.

 

We asked several finance professionals “How much compliance is too much? When a company like Satyam, which, in all probability was meeting all compliance norms, can commit a fraud of such magnitude, is increased compliance actually making our companies more secure or more difficult to run?"

 

The responses we received were divided in opinion regarding the need and necessity for stringent compliance norms.

There were some professionals who believed that you can never have too much compliance, if taken and accepted in the right perspective. It should ideally begin at the top level. Compliance, despite its probable costs, is essential for the business to exist in the socio economic environment and is a facilitator to its growth in the long run. Though the benefits may not be tangible, the risk and exposure of non compliance have obvious after effects.

However, compliance done as a mere formality is likely to result in fraud. It must be undertaken with proper internal controls and environment checks. Ideally, it should form a part of the DNA of every individual working for the organization. Companies would not fail in the normal course of events if compliance becomes an accepted way of life.

 

Another school of thought is that increased compliance is not necessarily the answer to making our companies more secure. ‘Too much compliance’ is likely to make our companies more difficult to run. A person who intends to cheat or bypass the regulations will find loop holes and manipulate even the strongest systems. For example - the Satyam episode involved a complete breakdown of all compensating controls such as independent audit, internal audit, effective independent auditors and complicity of the entire management.

Instead of more rigorous compliance, we require more effective compensating controls - such as rotation of auditors, greater role of lending banks in the financial analysis and compulsory rotation of independent auditors.

 

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  Comments (1)
1. VP-Finance, Persistent Systems Ltd
Written by Rohit Kamat, on 25-03-2009 02:56
Increased compliance is definitely making companies difficult to do business with and increasing cost of doing business. For example, in our company if we want to engage a new contractor, the contractor needs to produce proof of compliance under 7-8 different laws. Compliance formalities take 15 to 30 days. We cannot engage small contractors who are cost effective but who do not have administrative mechinery to ensure compliance under multiple laws. 
 
In order to reduce possibility of errors and fraud, businesses need a process of strong internal controls which essentially means more documentation and more approvals. This makes the entire organisation bureacratic and kills enterprise and initiative on part of people. Over a time, the organisation becomes less sensitive to its employees and to its customers. 
 
Does the whole bureacracy of internal controls and approvals reduce the risk of frauds is a big question. The people who prepetrate fraud, manage to do it despite best of systems and processes.  
 
Achieving balance between bureacratic processes and creative and enterprising work culture is important for long term success of organisations.

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