This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.
Corporate Governance - What Is It And Why Do We Need It? The term 'Governance' derived from Gubernare meaning to 'rule or steer' was traditionally associated with statecraft and administration. Academic discourse has tended to characterize measures in its pursuance as good vis a vis bad mainly according to parameters and standards of efficiency, transparency and accountability of the managers of the nation (i.e. the elected representatives, the administrative agencies etc.) and the stakeholders.
In present times, when a real threat to the very existence of the nation state has been mounted by the effects of globalization, primarily through the economic might of MNC's, it is only natural that a great deal of attention be paid to the governance of these entities as well. The occurrence of a substantial number of scandals involving large companies such as Enron, Qwest, Global Crossing, Satyam and the exposure of auditing lacunae bringing down the auditing giant Andersen has buttressed the search for an effective framework of investor protection.
Corporate governance refers to the mechanisms and processes by which corporations are governed. At the most elementary level, it can be described as the processes by which investors attempt to minimize the transaction costs and agency costs associated with doing business within a firm.  Hence, the need for Good Corporate Governance essentially arises due to the division between ownership and control which characterizes almost all modern companies. The primary trouble with such division, which forms the principal focus of corporate governance principles, is what is known as Agency Costs i.e. the tendency of the management to sub serve the stake holder's benefits to other objects which affect these stakeholders detrimentally.  In the opinion of the researcher, there are several types of problems that shareholders encounter when they seek to exercise their control over managers. First, retail investors (generally being small shareholders in a country like India) frequently lack sufficient access to information required to monitor and assess the management of a company since such control of flow of such information ordinarily resides with these very managers themselves. Moreover, even when access is secured, India's small shareholders by and large lack expertise to analyze the obtained information accurately. Furthermore, the high costs involved in such monitoring, dissuades active participation of shareholders in this process with each shareholder tending to hope that someone else will do the job.  Finally, large shareholders may have a conflict of interest, which can undermine their incentives to maximize firm value. For example, large shareholders may enjoy private benefits of control that may inappropriately influence their decision-making. 
Hence, there seems to be agreement among scholars and commentators on the incomplete nature of the corporate contract between investors and managers,  the need to control managerial shirking where there is a separation of ownership and control, and the need to protect specific capital investments.
Mandatory Regulation v. Self-Compliance with Corporate Governance Standards - A Middle Path
The question of whether a mandatory or enabling system of corporate governance is better for India becomes important especially in the light of the fact that the proposed amendment to the Companies Act [hereinafter 'The Act']  along the lines of Sarbanes-Oxley Act [hereinafter 'SOX Act'] of the U.S.  make adherence to some principles of corporate governance in the field of auditing and financial accounting as mandatory.
Proponents of the free market system dismiss the notion of a mandatory corporate governance regime, arguing that if enhanced corporate governance practices were beneficial and desired by investors, firms competing for scarce capital would implement them voluntarily.  On the other hand, investor advocates argue that an enabling regime is insufficient, since there is no guarantee that all firms will implement the reforms necessary to provide investors with adequate checks on agency problems. On this view, mandatory corporate governance, like rules prohibiting insider trading, is necessary to protect investors. 
Interestingly however, the United States, arguably one of the biggest champions of a laissez faire or a free market approach has now made certain aspects of corporate governance mandatory under the Sarbanes-Oxley Act.  Other countries like Canada,  however opted for an enabling, or partially enabling, regime under which firms can choose governance practices from a list of best practices and must disclose these choices. In India, some of the requirements of Corporate Governance are embedded in various provisions of the Act, and can also be seen in Clause 49 of the listing Agreement and Section 292A of the Act.
Chapter - 2 Transparency In Financial Accounting As A Part Corporate Governance
Having seen the basic tenets of corporate governance in the previous chapter, it is important to analyze one particular aspect of corporate governance i.e. transparency in financial accounting. One requirement which all corporate governance regimes incorporate (albeit to different extents) is clarity in the accounting standards and processes of companies. For instance, in the Indian context, the Irani Committee has suggested a four point agenda to be adhered to in the company's preparation of its account which is as follows: 
Disclosure accuracy and adequacy
Synchronization of law and Accounting Standards
Auditors of the Company play an important role in this aspect of Governance and the Act, primarily through its provisions from Section 224 to 233 seek to regulate the audit of company's accounts and its external auditors. Before proceeding to an analysis of the Indian provisions of law and the recommendation of various committees and experts in this regard, the researcher would like to provide an account of two major corporate scandals which took advantage of poor accounting standards and disclosure requirements i.e. ENRON from the USA and Satyam from India. The ENRON scam is widely viewed in terms of audit failure as one which pushed the law to its limit i.e. it was orchestrated by a bending of the accounting and disclosure standards require rather than their blatant violation.
THE ENRON DEBACLE 
The Enron debacle has been analyzed from various perspectives and consequently a large number of reasons have been attributed to the collapse of what was till then considered a model corporation and a giant in the Power Sector. One such perspective has stressed on the role played by the auditors and the old and prestigious firm of Arthur Andersen in particular. Studies after the collapse of Enron have concluded that outside investors, including financial institutions, may have been misled about the corporation's net income (which was subsequently restated) and its losses and liabilities (which were far larger than reported).  There was hence failure in the report to reflect clearly the inner picture of the corporation's finances.
At the very outset however, it is emphasized that these misrepresentations were made despite the fact that there were already mechanisms in place in the USA for the protection of investors and the public as a whole. These safety measures included Generally Accepted Accounting Principles (GAAP), Generally Accepted Auditing Standards (GAAS), Statements on Auditing Standards (SAS), and all professional ethics.  Enron took these rules and circumvented them to allow certain individuals within the company to make money from the increased investments from stockholders. They did this by bolstering their balance sheet with inflated asset values, and dispersing their liabilities to subsidiaries that they just didn't consolidate.  This was made possible in part, by certain actions of the leading partner on the audit, David B. Duncans, who went to great lengths to conceal and overturn internal memos which highlighted conflicts between the internal auditors and audit committee of ENRON. 
One of the most important causes for this audit failure was the fact that the independence of Andersen had been compromised on account of the close personal and financial interests of the partners in ENRON and because of the huge fees which Andersen received for its non-audit services. Both these factors compromised the independence and objectivity of the audit firm. Hence the ENRON scandal clearly shows that the mere existence of accounting standards will not suffice in the absence of independently functioning external auditors and moreover an understanding by the Company itself that self-compliance to assigned corporate government standards benefits them.
THE SATYAM SCANDAL
Satyam, India's fourth largest IT services firm collapsed early last year followed by a confession by the company's founder and CEO Ramalinga Raju stating that his company had been falsifying its accounts for years, overstating revenues and inflating profits by $1 billion.  According to Mr Raju's statement, about $1bn (£0.65bn), or 94% of the cash on the company's books, was made up - and analysts say it was the manipulation of the cash flow which could have been one reason why the deceit was undetected. 
The corporate debacle dubbed as "India's Enron" reflected the realities of corporate governance in India. Indian company boards are a cozy nexus and their proceedings are for the mutual benefit of their members.Key information that passes between them is rarely revealed to the public.
The question is did the debacle shock India enough to shake it up and make it realize this. The opinion on that remains divided. While there is a set of people who believe that Satyam definitely made promoters sit up and make alterations, there is an equally strong lobby that says nothing has changed in the real sense of the term. 
The more positive set of people believed that there is an evident change in the way the boards work. Adi Godrej, Chairman of Godrej Group says "There has certainly been a bit of a change in the last few months in the way boards are functioning. Audit committees are being more careful to ensure that the external auditors perform their role more diligently. We also find that the chairman of the board and members of the audit committee are being more careful and thorough in their questioning. Boards, too, are taking care to ensure that there are no slip-ups at their end," .Noted industrialists, who sit on multiple boards besides their own companies, also find a perceptible change in the attitude of independent directors on boards. In some of the progressive boards, the days of one-sided presentations by the management and mute acceptance of the promoter /management agendas are over, as independent directors begin to assert themselves and ask awkward questions they wouldn't dare earlier. 
Chapter - 3 The Auditor's Role In Corporate Governance
Principal Duties Of Auditors In Relevance To An Effective Corporate Governance Regime
While it has been held that a statutory auditor is not an advisor and is not concerned with the policy of the company  , it has been reiterated that the auditor is an agent of the shareholders of the company who appoint him for their own protection  and that he is expected inter alia to examine the accounts maintained by the Directors with a view to inform the shareholders of the true financial position of the company.  It is often said that the primary area of concern with respect to auditors is maintaining their independence and ensuring the provision of a high quality of audit services at the same time.
Duty to Provide a Fair View Of the Financial Affairs
The primary duties of statutory auditors have been listed in Section 227 of the Act. The basic thread running through the powers given to the auditors and the consequent duties imposed on them is that the audit of the company should be carried on in such a way that the auditor is in a position to certify that so far as the balance sheet and profit and loss account of the company is concerned, it gives a true and fair view  of the company's financial affairs.  In reaching this opinion, the duties of the auditor broadly involve conducting enquiries  , reporting on the basis of such enquiries to the members on the compliance of the propriety and adequacy of accounting standards  adopted in the books of account, profit and loss statement and balance sheet. Indeed, the Irani Committee Report recognizes this to be the primary function of auditors by stating that "auditors are required to carry out their work within the discipline of the legal provisions and the standards of accounting/Accounting Standards (where notified)."  However in India, there is an absence of any uniform code of accounting standards and the same is only now under consideration and formulation by an instrumentality of the National Advisory Committee on Accounting Standards (NACAS).  Until such formulation is complete, there is ample of scope of abuse by non-independent auditors who would seek to give a flexible interpretation of what in fact gives true and fair view to the detriment of investors. It has been suggested that 'the basic duties of the Auditors and their liability need to be laid down in the law itself instead of in the Rules." 
Duty to report frauds
The Australian position as regards the statutory auditor's duty to report frauds is concerned has been enunciated in the case of Frankston and Hasting Corporation v. Cohen  which held it is a primary function of the auditor. It has been suggested that there seems to be a dichotomy between the Indian and Australian position.  The basis for such an argument has been that Indian law seems to accord this as a secondary duty of the auditors' and requires the auditors to be mere watchdogs and not bloodhounds.  It is submitted that this statement has been taken out of its context and in light of other decisions of English Courts  as well as Indian Auditing Guidelines  stating that if an auditor discovers that a senior employee of the Company has been defrauding that company on a grand scale, and is in a position to go on doing so, then it will normally be the duty of the auditors to report what has been discovered to the management of the company at once or directly to a third party without the consent and knowledge of the management where the situation so demands. Indeed the position must be in this way keeping in mind the magnitude of modern day corporate scams - Every Safeguard Must Be Taken.
Auditor's duty in the Audit Committee - Internal Auditors assume prominence
The concept of Audit Committees was introduced in India by the Companies (Amendment) Act, 2000.  The Audit Committee is a committee of directors (mainly non-executive) whose primary responsibility is to review the financial statement before their submission to the board.  Section 292A requires that both the internal auditor and the statutory auditor attend every meeting of the Audit Committee but shall not have the right to vote. The primary function of the internal auditors in the audit committee is to appraise the Committee which mainly consists of the non-executive directors of the company, with a review of the organization's power and control structures, an objective evaluation of the existing risk and the internal control framework, a systematic analysis of business processes, reviews of the existence and value of assets, reviews of operational and financial performance etc.  It has however been argued that since the terms of reference of the Audit Committees are to be articulated by the Board of Directors themselves, these Committees will be effective only in a situation of voluntary compliance.  Hence, once again the researcher would like to assert that mere existence of a legal framework aiding corporate governance measures will not suffice and the adherence to these rules in spirit must come from within the company itself.
Hence it can be seen that the law accords tremendous significance to the duty of the auditor in providing to the shareholders and accurate and fair understanding of the affairs of the company. It is clear that the auditors are the fiduciaries of the shareholders and not of the management.
To sum up, it becomes clear that India is slowly moving towards the implementation of a mandatory scheme of corporate governance. While this is welcome, the researcher would like to reiterate that a mere mandatory framework will not suffice and adherence to corporate governance norms 'from within' such companies is absolutely necessary.
Furthermore, a barrage of studies has been conducted around the independent functioning of the external auditors of companies especially after the audit failures in scandals such as the Enron, Parmalat and Satyam. The most important recommendations of the NCCR and the Irani Committee Report have found their way into the proposed amendment bill. These primarily focus on issues of issues of rendering of non-audit services and appointment, remuneration, and disqualifications of auditors.
As regards the prohibition of non-audit services by the proposed Section 226A, the researcher supports the same insofar as it incorporates the list provided by the NCCR. However, Section 226A(j) allowing addition to this list needs to be reconsidered as, in the opinion of the researcher this goes against the explicit intentions of the NCC and may easily lead to a situation of over exploitation. 
The researcher supports the proposed additions to the disqualifications of auditors on the basis of their vested personal or financial interests in the company as maintenance of auditor objectivity is of utmost importance. The researcher also advocates introducing a minimum audit fee and the exclusion of reimbursement expenses from the calculation of audit fees in light of the observation by the NCCR that there remuneration of auditors in the country is low.
Finally, the researcher is of the opinion that there need to be a reconsideration of the present position on auditor's liability towards individual shareholders. In the opinion of the researcher, accountability of auditor to individual shareholders is essential for a good regime of disclosure and transparency in financial accounting.