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'Audit committees in India have to be financially literate'

Martin Studer of EMEIA and Ram Sarvepalli of E&Y speak to Dhiman Chattopadhyay on why internal audit process and composition of boards in most Indian firms need to change.

Dhiman Chattopadhyay | Print Edition: August 23, 2009

Ram Sarvepalli
Ram Sarvepalli

Martin Studer, Managing Partner, Business Risk Services, EMEIA, and Ram Sarvepalli, Partner and National Director, Business Risk Services, Ernst & Young, spoke to Dhiman Chattopadhyay on why the internal auditing process and composition of boards in most Indian companies need to change. Excerpts:

Many Indian firms still do not have a proper internal auditing system in place. What are the hurdles?
RAM: The willingness may be there but most companies outside of the top 100 do not have the right processes in place. Audit committee and board meetings are often held simultaneously, with little attention paid to audit committee findings.

MARTIN: Also, unlike in Europe or the US, seldom do external and internal audit committees sit together to discuss key risks and problems here.

Numbers Of Note
Rs 1,548 cr: The total amount of financial irregularities found in telecom PSUs in a report by the Comptroller & Auditor General (CAG) of India
3.3 billion: India’s theatre admissions for 2008 is higher than the combined total of the next nine biggest film producing countries, according to the European Audiovisual Observatory in its publication Focus 2009-World Film Market Trends
$4.5 billion: Money that India would get from the International Monetary Fund’s Special Drawing Rights (SDR) to battle the economic slowdown
8%: The decline in passenger traffic carried by domestic airlines between January to June 2009, in comparison with the same period in 2008

What about risk management?
MARTIN: Risk management is not about avoiding risks, but taking well-informed risks, arriving at a “risk consensus” and then scoping (what risks are we talking about), assessing (do we have a methodology to measure it) and reporting it (how to incorporate the measures undertaken to mitigate risks).

RAM: Unfortunately, when you look at many Indian boards, the level of risk consensus understanding is low. Risk is not identified properly and the plan for managing risks is not documented, making it impossible for audit committees to audit them.

How can the process be streamlined?
MARTIN: In the West, it took a decade to get things in order. The trigger was government regulations that warned of punitive action as well. For instance, it’s now mandatory for audit committees to be financially literate, which means they have to meet IFRS standards.

RAM: Getting audit committees to be financially literate here is a long-haul job. The composition of boards, too, needs a closer look, especially around skills of the independent directors and their ability to drive the committee agendas. Finally, the Companies Act needs more teeth.

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