Redefining the role of the CFO [Source: Indian Express Finan

Redefining the role of the CFO
 

By Viveat Susan Pinto
 

As investigators attempt to put a finger on the quantum of fraud committed at Hyderabad-based Satyam Computer Services Ltd (SATYAM.BO : 49.85 -5.6), it is increasingly becoming clear that nothing could have happened without the knowledge of the company's chief financial officer (CFO) Srinivas Vadlamani, despite his assertions to the contrary. The role of the CFO in general has come under scrutiny following the Satyam episode, which brings us to the question: Does it need to undergo a transformation in the changing business order?

To most, the CFO is the number-cruncher rattling off figures concerning the company at results meets and conferences. But he also has a larger role to play, say observers, in raising finance, performing audits, understanding the income and expenditure of the company, thereby helping to put in place cost efficiency measures wherever required. "It is already very broad-based," says S K Joshi, director (finance), Bharat Petroleum Corporation (BPCL.NS : 389.55 +11.15) Limited (BPCL). "All listed companies adhere to Clause 49 of the Listing Agreement by the Securities and Exchange Board of India. This helps the regulator monitor corporate governance levels of these companies," he says. Adds the CFO of a prominent Indian company, "There is a framework in place to monitor disclosures made by a company. It's required if you want to bring about overall credibility."

Despite this, frauds still happen. Satyam is a case in point. It was the fourth largest Indian IT services provider till a few months ago. It had bluechip clients with offices all over the world. Yet, founder and chairman Ramalinga Raju, overstated accounts by his own admission for several years. This was done ostensibly to prevent a takeover attempt by rivals since the promoters held a small percentage of the company's shares. Poor financial performance would make the company an easy target, Raju reasoned in an open letter to the Satyam board earlier this month. Of course, all of this is in the realm of investigation at the moment.

But many observers are of the opinion that a fraud of this nature couldn't have happened without the active collusion of members of Raju's team, including CFO Vadlamani. It explains why besides Raju and his brother Rama Raju, who was the managing director of Satyam, even Vadlamani has been subjected to intense interrogation following their arrest recently. Says Bakul Dholakia, ex-director of the Indian Institute of Management, Ahmedabad, who is now director at the Adani Institute of Infrastructure Management, "Rules and regulations have been formed so that one can adhere to them. The issue is about enforcing them." But the question is: who's going to do this?

The position of the CFO like that of the chief executive officer is not a statutory one under the Companies Act, 1956. This means there are no rules and regulations under the Companies Act at least, which bind the conduct of the executives directly. It is the board of directors, which has been given express powers under the Companies Act to govern the conduct of the CEO and the CFO.

In the event of the board being compromised by either of the two, malafide conduct can be easily brushed under the carpet, leave aside it being penalised, say experts. That's what seemed to be happening in the case of Satyam where Raju was allowed to overstate accounts for such a long time with no objection coming from any quarter, not even from external auditor PricewaterhouseCoopers. The audit firm's motives have been questioned since the breakout of the episode, with some calling for its ban in the country.

Says a chartered accountant on condition of anonymity, "PwC has been banned in Japan. The firm should be banned in India, too. Actions of a single entity mar the image of the entire community. Strong action must be taken against the firm," Says B K Goenka, vice-chairman and managing director, Welspun group. "It's a question of transparency. As long as you are not transparent, I don't think episodes like this can be prevented. There is a need for strict action against those who participated in the wrongdoing."

Even as tempers run high on the role of the auditor and others in abetting the fraud, law and policy makers are attempting to foolproof company rules and regulations to prevent the occurrence of any such event in the future. An amendment to the Companies Act, for instance, to make the positions of the CEO and the CFO statutory was introduced in Parliament last year. Following the Satyam episode, say experts, the amendment Bill would have to be passed sooner or later to get these positions into the legislative ambit quickly. Says Shailesh Haribhakti, a renowned chartered accountant and chairman and managing partner of BDO Haribhakti, "Hopefully, the bill should go through. It will indeed help the cause of corporate governance. That's important at this point in time."

Currently, only the board of directors is governed by the Companies Act. Sections 252 to 323 of the Act lay down elaborate rules and regulations concerning how the board should conduct its affairs, how members of the board must be elected, their salaries et al. "It is the board that has the power to appoint the CEO and the CFO according to the Act," says Anuradha Salhotra, managing partner at New Delhi-based law firm Lall, Lahiri and Salhotra.

But with institutional investors today holding significant stakes in most companies, argues Tandon, the tendency of most of them to ignore proceedings of the board is common. "Many of them don't really take active interest in the goings-on at the company. For them what matters is return on investment."

Some beg to differ on this point. "I don't think institutional shareholders are a passive lot today. Look what they did to the promoters of Satyam," says a Mumbai-based corporate lawyer. It was the institutional shareholders, for the record, who first raised a hue and cry over Satyam's attempts to buyout 51% of Maytas Infra and 100% of Maytas Properties companies promoted by the Raju family for an estimated $1.6 billion or Rs 8,000 crore in December last year. The rationale given by the Satyam management then was that the deal would allow them to derisk the company's business model. Infrastructure was a good bet, they reasoned, given the prospects it held. Buying an IT company didn't make sense at a time when the market conditions were not favourable.

Institutional shareholders, however, were unwilling to buy this theory put forth by the management to justify the acquisition. The ensuing din that followed compelled Satyam to call off the deal in the process, exposing Raju and his team. Even the board, which included heavyweights such as Krishna G Palepu, professor of business administration at Harvard Business School and Vinod Dham, inventor and venture capitalist, weren't spared the ire of shareholders. Questions were raised concerning the board's motives to permit a deal of this nature to go through leading to the resignation of most members. Says Urvi Piramal, chairperson, Ashok Piramal Group, "It's unfortunate that something like this has happened. Shareholders' interest cannot be taken for granted. At no point can you compromise on your integrity."

Ironically, the role of independent directors has come into sharp focus following the Satyam episode. Clause 49 of SEBI's Listing Agreement specifies that every listed entity must reserve half the board for independent directors if the chairman is the executive director. These directors must have no pecuniary relationship with the company, its promoters, management or affiliates neither should they be partners of the auditors, lawyers or consultants of the company. They should not hold 2% or more shares of the company. Above all, they should not be related to the promoters or senior management nor should they have been executives with the company in the last three years. The idea quite clearly is to bring about greater depth, transparency and objectivity to the board by appointing members who are "neutral" in nature.

Yet, that is never the case, say experts. More often than not independent directors are appointed from a pool of contacts known to the promoter. "That doesn't help much," says an insider. "What you end up with is a coterie favouring the promoter. You can imagine the nature of the board then." Says Arvind Singhal, chairman of New Delhi-based management consultancy KSA Technopak Advisors Ltd, "Some of the members appointed may be the best brand names in the business, but they may not necessarily be the best for the board. That's where the problem emerges. They are not able to add significant value to the business. It's the company that suffers in the end when the constitution of the board is not right."

And for a CFO or a CEO to manipulate such a board becomes relatively easy since independent directors very often barely have the time to scrutinise documents, books of accounts or financial statements due to their allied business commitments. "There is need for a good whistle-blower policy," says Dholakia, who is himself an independent director of at least six companies. "The CFO's role is clearly defined. But I think he needs to rise above the challenge of wanting to conceal to appease certain sections or quarters in the company. What is the correct financial position must be indicated. That's the call he needs to take." Says Kishore Biyani, chief executive officer, Future Group, "It's a slow and steady process of learning. I think companies will evolve following this episode, whether it is making boards transparent or CFOs accountable. I think it will happen. I am optimistic."