A PROJECT On

Accounting standards and governance levels

Being Submitted in Partial Fulfillment of the Degree of M.B.A. Finance For the Course of AUDIT AND COMPLAINCE

SUBMITTEDBY: DEEPIKA MALOO M.B.A.-FINANCE IV SEM ROLL NO. 242

SUBMITTED TO: PROF.(DR.) U.R. DAGA FACULTY OF MANAGEMENT

INDEX
SERIAL NO.
a. 1. 1.1 1.2 2. 2.1 2.2 Executive Summary Introduction: Indian accounting standards International financial reporting standards Corporate governance Governance Corporate governance in India Role of Accounting in Corporate governance Transparency & Disclosure Issues Conclusion Suggestions Bibliography 4 5 5 13 16 16 16 24 25 28

CHAPTER

PAGE NO.

3. 3.1 3.2 4. 5. 6.

29 31 33

ACKNOWLEDGEMENT

As anyone who has written a project work, or research work, it is quite impossible to acknowledge by name every individual who has played some part in this work. I feel it difficult to express in words my profound sense of gratitude to most respected persons who helped me to make this work possible. I acknowledge my gratitude to respected faculty Prof. U. R. Daga for having laid the foundation of the work by providing the skeleton upon which this skinny body of project is wrapped up and who have been kind enough to suggest improvement of this work and make it broad, based. An ample use of various reference readings has been very frequently made while compiling data for this project. Such rich reading has been made available at hand by the treasure-like well maintained library of the National Law University, Jodhpur. I am very much grateful to the library staff of the university for their unfailing co-operation. I am very much under obligation to mention here, the contributions of my batch mates who have, knowingly or unknowingly, provided me the competitive edge which is the driving force of the whole labour and extra labour put into the project. Finally, I feel very much gratified to the administration of the National Law University, Jodhpur for providing comfortable environment, rich infrastructure and the accessibility to internet without which it is not possible to imagine the completion of this project work.

Deepika maloo

EXECUTIVE SUMMARY

Corporate Governance is a voluntary, ethical code of business concerned with the morals, ethics, values, parameters, conduct and behavior of the company and its management. Good corporate governance ensures that companies perform better and have a better relationship with its stakeholders. The proper practice of accounting standards is very significant, as it leads to the effective disclosure and consequently good corporate governance programmes. Hence, the practice of proper accounting standards is more relevant issue of good corporate governance in the present competitive era as the standards provide a useful mechanism to restructure the core corporate values. In this context, the project so undertaken attempts to discuss the practice of accounting standards for good corporate governance, as it is regarded as one of the important relevant issues of corporate governance. An examination of practices of accounting standards, and their issues in Indian industry may help to understand the existing practices of accounting standards, which in turn help in designing the effective standard practices so as to ensure good Corporate Governance

INTRODUCTION
1.1 INDIAN ACCOUNTING STANDARDS1
1.1.1 A PERSPECTIVE The paradigm shift in the economic environment in India during last few years has led to increasing attention being devoted to accounting standards as a means towards ensuring potent and transparent financial reporting by corporate. Further, cross-border raising of huge amount of capital has also generated considerable interest in the generally accepted accounting principles in advanced countries such as USA. Initiatives taken by International Organisation Securities Commission (IOSCO) towards propagating International Accounting Standards (IASs)/ International Financial Reporting Standards (IFRSs), issued by the International Accounting Standards Board (IASB), as the uniform language of business to protect the interests of international investors have brought into focus the IASs/ IFRSs. The Institute of Chartered Accountants of India, being a premier accounting body in the country, took upon itself the leadership role by establishing Accounting Standards Board, more than twenty five years ago, to fall in line with the international and national expectations. Today, accounting standards in India have come a long way. 1.1.2 Rationale of Accounting Standards Accounting Standards are formulated with a view to harmonize different accounting policies and practices in use in a country. The objective of Accounting Standards is, therefore, to reduce the accounting alternatives in the preparation of financial statements within the bounds of rationality, thereby ensuring comparability of financial statements of different enterprises with a view to provide meaningful information to various users of financial statements to enable them to make informed economic decisions. The Companies Act, 1956, as well as many other statutes in India require that the financial statements of an enterprise should give a true and fair view of its financial position and working results. This requirement is implicit even in the absence of a specific statutory provision to this

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effect. The Accounting Standards are issued with a view to describe the accounting principles and the methods of applying these principles in the preparation and presentation of financial statements so that they give a true and fair view. The Accounting Standards not only prescribe appropriate accounting treatment of complex business transactions but also foster greater transparency and market discipline. Accounting Standards also helps the regulatory agencies in benchmarking the accounting accuracy. 1.1.3 International Harmonization of Accounting Standards Recognizing the need for international harmonization of accounting standards, in 1973, the International Accounting Standards Committee (IASC) was established. It may be mentioned here that the IASC has been reconstituted as the International Accounting Standards Board (IASB). The objectives of IASC included promotion of the International Accounting Standards for worldwide acceptance and observance so that the accounting standards in different countries are harmonized. In recent years, need for international harmonization of Accounting Standards followed in different countries has grown considerably as the cross-border transfers of capital are becoming increasingly common. 1.1.4 Accounting Standards-setting in India The Institute of Chartered Accountants of India (ICAI) being a member body of the IASC,constituted the Accounting Standards Board (ASB) on 21st April, 1977, with a view to harmonize the diverse accounting policies and practices in use in India. After the adoption of liberalisation and globalisation as the corner stones of Indian economic policies in early 90s, and the growing concern about the need of effective corporate governance of late, the Accounting Standards have increasingly assumed importance. 1.1.5 Composition of the Accounting Standards Board The composition of the ASB is broad-based with a view to ensuring participation of all interest groups in the standard-setting process. These interest-groups include y Industry, representatives of various departments of government and regulatory authorities, y Financial institutions and academic and professional bodies.

o viz., Associated Chambers of Commerce & Industry (ASSOCHAM), o Confederation of Indian Industries (CII) and o Federation of Indian Chambers of Commerce and Industry (FICCI). y Government departments and regulatory authorities o Reserve Bank of India, o Ministry of Company Affairs, o Comptroller & Auditor General of India, o y Controller General of Accounts and Central Board of Excise and Customs

Representatives of academic and professional institutions such as o Universities, o Indian Institutes of Management,

o Institute of Cost and Works Accountants of India and o y Institute of Company Secretaries of India

Elected members of the Central Council of ICAI are also on the ASB.

1.1.6 Accounting Assumptions2

The International Accounting Standards Committee (lASC) as well as the Institute of Chartered Accountants of India (ICAI) treat (vide IAS-I & AS-I) the following as the fundamental accounting assumptions: (1) Going concern In the ordinary course, accounting assumes that the business will continue to exist and carry on its operations for an indefinite period in the future. The entity is assumed to remain in operation sufficiently long to carry out its objects and plans. The values attached to the assets will be on the basis of its current worth. The assumption is that the fixed assets are not intended for re-sale. Therefore, it may be contended that a balance sheet which is prepared on the basis of record of facts on historical costs cannot show the true or real worth of the concern at a particular date. The underlying principle there
2

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is that the earning power and not the cost is the basis for valuing a continuing business. The business is to continue indefinitely and the financial and accounting policies are followed to maintain the continuity of the business unit. (2) Consistency There should be uniformity in accounting processes and policies from one period to another. Material changes, if any, should be disclosed even though there is improvement in technique. A change of method from one period to another will affect the result of the trading materially. Only when the accounting procedures are adhered to consistently from year to year the results disclosed in the financial statements will be uniform and comparable. (3) Accrual Accounting attempts to recognize non-cash events and circumstances as they occur. Accrual is concerned with expected future cash receipts and payments: it is the accounting process of recognizing assets, liabilities or income for amounts expected to be received or paid in future. Common examples of accruals include purchases and sales of goods or services on credit, interest, rent (not yet paid), wages and salaries, taxes. Thus, we make record of all expenses and incomes relating to the accounting period whether actual cash has been disbursed or received or not. If a fundamental accounting assumption (i.e. Going concern, consistency and accrual) is not followed (in the preparation of financial statements) the fact should be disclosed. 1.1.7 Accounting standards3 The term standard denotes a discipline, which provides both guidelines and yardsticks for evaluation. As guidelines, accounting standard provides uniform practices and common techniques of accounting. As a general rule, accounting standards are applicable to all corporate enterprises. They are made operative from a date specified in the standard. The Institute of
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Chartered Accountant of India (ICAI) constituted the Accounting Standards Board (ASB) in April, 1977 for developing accounting standards In the initial years the standards are of recommendatory in nature. Once an awareness is created about the benefits and relevance of accounting standards, steps are taken to make the accounting standards mandatory for all companies. In case of non compliance, the companies are required to disclose the reasons for deviations and its financial effect . However, the ICAI has so far issued 29 accounting standards. These are : y AS-1: Disclosure of accounting policies (January 1979). This standard deals with the disclosure of significant accounting policies in the financial statements. y AS-2: Valuation of Inventories (June 1981). This standard deals with the principles of valuing inventories for the financial statements. y AS-3: (Revised) Cash flow statement (June 1981, Revised in March 1997). This standard deals with the financial statement which summaries for a given period the sources and applications of an enterprise. y AS-4: Contingencies and events occurring after the Balance Sheet date (November 1982, Revised in April, 1995) This standard deals with the treatment of contingencies and events occurring after the balance sheet date. y AS-5: Net profit or loss for the period, prior period (period before the date of balance sheet) items and changes in accounting policies (November 1982, Revised in February 1997). This standard deals with the treatment in financial statement of prior period and extraordinary items and changes in accounting policies. y AS-6: Depreciation Accounting (November 1982). This standard applies to all depreciable assets. But this standard does not apply to assets in the category of forests, plantations and similar natural resources and wasting assets. y AS-7: Accounting for construction contracts (December 1983, revised in April 2003). This standard deals with accounting for construction contracts in the financial statements of contractors. y AS-8: Accounting for Research and Development (January 1985). This standard deals with the treatment of costs of research and development in financial statements.

AS-9: Revenue Recognition (November 1985). This standard deals with the bases for recognition of revenue in the statement of profit and loss of an enterprise.

AS-10: Accounting for fixed assets (November 1991). This standard deals with recognition of fixed assets grouped into various categories, such as land, building, plant and machinery, vehicles, furniture and gifts, goodwill, patents, trading and designs.

AS-11: Accounting for the effects of change in foreign exchange Rates. (August 1991 and Revised in 1993). This standard deals with the issues relating to accounting for effect of change in foreign exchange rates.

AS-12: Accounting for Government grants (April 1994). This standard deals with the accounting for government grants.

AS-13: Accounting for investments (September 1994). This standard deals with accounting aspect concerning investments in the financial statements. These include classification, determination of cost for initial recognition, disposal and re-classification of investment.

AS-14: Accounting for amalgamation (October 1994). This standard deals with accounting treatment of any resultant goodwill or reserves in amalgamation of companies.

AS-15:

Accounting for retirement Benefits in the financial statements of employers

(January 1995). This standard deals with accounting for retirement benefits in the financial statements of employers. y AS-16: Borrowing Costs (April 2000). This standard deals with the uses involved relating to capitalization of interest on borrowing for purchase of fixed assets. AS-17 Segment reporting (October 2000). This standard applies to companies which have an annual turnover of Rs 50 crores or more. These companies have to present financial statements and consolidated financial statements. y AS-18: Related party disclosures (October 2000 revised 1st July 2003). This standard requires certain disclosure which must be made for transactions between the enterprise and related parties. y AS-19: Leases (January 2001). This standard deals with the accounting treatment of

transactions related to lease agreements. y AS-20: Earning per share (April 2001). This standard deals with the presentation and computation of earning per share (EPS).

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AS-21: Consolidated financial statements (April 2001). This standard deals with the preparation of consolidated financial statements with an intention to provide information about the activities of a group.

AS-22 : Accounting for taxes on Income (April 2001). This standard deals with determination of the account of tax expenses for the related revenue.

AS-23: Accounting for investments in Associates in consolidated financial statements (July 2001). This standard deals with the principles and procedures to be followed for recognising, in the consolidated financial statement.

AS-24: Discontinued operations (February 2002). This standard deals with the principles of discontinuing operations of an enterprise with the activities which are continuing.

AS-25: Interim financial reporting (February 2002). This standard deals with the minimum content of interim financial report.

AS-26: Intangible Assets (February 2002). This standard prescribed the accounting treatment for intangible assets which are not covered by any other specific accounting standard.

AS-27: Financial reporting of interest for joint venture (February 2002). This standard sets principles and procedure for accounting for interest in joint venture.

AS-28: Impairment of Assets (2004). This standard prescribed procedure to ensure that an asset is carried at no more than its carrying amount and procedures as to when to recognise an asset as impaired.

AS-29: Provision for contingent labilities and contingent assets (2004). This standard deals with measurement and recognition criteria in three areas, namely provisions, contingent liabilities and contingent assets.

1.1.8 Compliance with Accounting Standards Accounting Standards issued by the ICAI have legal recognition through the Companies Act, 1956, whereby every company is required to comply with the Accounting Standards and the statutory auditors of every company are required to report whether the Accounting Standards have been complied with or not. Also, the Insurance Regulatory and Development Authority (IRDA) (Preparation of Financial Statements and Auditors Report of Insurance Companies)
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Regulations, 2000 requires insurance companies to follow the Accounting Standards issued by the ICAI. The Securities and Exchange Board of India (SEBI) and the Reserve Bank of India also require compliance with the Accounting Standards issued by the ICAI from time to time. Section 211 of the Companies Act, 1956, deals with the form and contents of balance sheet and profit and loss account. The Companies (Amendment) Act, 1999 has inserted new sub-sections 3A, 3B and 3C to Section 211, with a view to ensure that the financial statements are prepared in accordance with the Accounting Standards. The new sub-sections as inserted are reproduced below: y Section 211 (3A): Every profit and loss account and balance sheet of the company shall comply with the accounting standards y Section 211 (3B): Where the profit and loss account and the balance sheet of the company do not comply with the accounting standards, such companies shall disclose in its profit and loss account and balance sheet, the following, namely:a) the deviation from the accounting standards; b) the reasons for such deviation; and c) the financial effect, if any, arising due to such deviation y Section 211 (3C): For the purposes of this section, the expression accounting standards means the standards of accounting recommended by the Institute of Chartered Accountants of India, constituted under the Chartered Accountants Act, 1949 (38 of 1949), as may be prescribed by the Central Government in consultation with the

National Advisory Committee on Accounting Standards established under sub- section (1) of section 210A.

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1.2 INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)4

International Financial Reporting Standards (IFRS) are principles-based Standards, Interpretations and the Framework (1989) adopted by the International Accounting Standards Board (IASB). Many of the standards forming part of IFRS are known by the older name of International Accounting Standards (IAS). IAS were issued between 1973 and 2001 by the Board of the International Accounting Standards Committee (IASC). On 1 April 2001, the new IASB took over from the IASC the responsibility for setting International Accounting Standards. During its first meeting the new Board adopted existing IAS and SICs. The IASB has continued to develop standards calling the new standards IFRS.

1.2.1 ADOPTION OF IFRS IN INDIA IFRS is a novel way of looking at accounting. IFRS is a principle-based standards rather than rule-based standard which are currently followed. Under IFRS there is need to apply professional judgment consistent with intent and spirit of standards. Various countries have adapted to IFRS in different ways, often embedding local cultures and that is why there are no standard rules; only broad principles which define the outer boundary of accounting. Indian Companies are listed on overseas stock exchange and have to prepare accounts with respect to GAAP followed in respective countries. Foreign companies having subsidiary in India have to prepare there accounts in order to meet overseas reporting. FDI and FIIs are more comfortable with one global accounting language which can be understood globally. Currently IFRS has been made applicable from the reporting year 2011 (or 2011-12, as the case may be) by Ministry of Corporate Affairs for the following: y y y y Listed companies Bank, Insurance companies, mutual funds and Financial Institutions Companies having Turnover in preceding year exceed INR 1 Billion Companies having Borrowing in preceding year exceed INR 250 Million

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1.2.2 MAJOR DIFFERENCES BETWEEN IFRS AND US GAAP

IFRS fixed assets rules questions valuation on historical cost basis, questions application of uniform rates of depreciation on all components of a fixed asset as also the amortization of intangible assets such as goodwill or patents.

In IFRS off-balance sheet transactions had been made as part of accounts; it brings a whole new meaning to the reported numbers.

It defines control of entities not through percentage of holdings but by the decisionmaking power inherent in the parent company.

Earnings will no more be a steady figure that can be easily targeted depending as it is not just on sales and expenses but also changes in asset values and the ability to measure those correctly.

To be adequately prepared for IFRS, senior management has to also shape up by analyzing which management models and strategies will work best for their organizations facing a huge level of turbulence and thus should prepare an IFRS roadmap. 1.2.3 NEED FOR IFRS y Level of confidence: The key benefit will be common accounting system that is perceived as stable, transparent and fair to investors across the world. y Risk evaluation: IFRS will eliminate barriers to cross-border listings and will b beneficial for investors who generally ascribe a risk premium if the underlying financial information is not prepared in accordance with international standards. y Merger & takeover activity: Cross border mergers and acquisitions will get a boost by making it easier for the parties involved in as far as redrawing the financial statements is concerned. y Investment: Foreign investors will be attracted to economies where IFRS compliant financial statements are the norm.

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1.2.4 IMPACT OF IFRS IMPLEMENTATION There are several areas where impact of IFRS exists for entities such as presentation of accounts, accounting policies and procedures, language of legal document, the way the entity will look at its business model and conduct business. At the transition stage itself company has to be give careful thought and planning for its accounting policy and procedure because it in turn will affect financial position of company and its operations. 1.2.5 CHALLENGES FACED BY COMPANIES IN IFRS IMPLEMENTATION

y y y y

IFRS is itself a moving target with changes being done continually There are not many trained resources for IFRS Also IFRS training in an organization will be huge task Not many people are aware and have understanding of IFRS

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2. CORPORATE GOVERNANCE5
2.1 GOVERNANCE

The term governance means the way people are governed and the way the affairs of the state are administered and regulated. This concept, drawn from the public administration, has received increasingly greater attention in business world in the sense of direction and control of companies by their top management.

2.2 CORPORATE GOVERNANCE

Corporate governance means the idea of ensuring proper management of companies through the institutions and mechanisms available to the shareholders. The Cadbury Committee Report (1991) defines corporate governance as

a system, by which corporate are directed and controlled. Corporate governance is a system by which a corporate entity is directed and controlled in a given economic, political and social environment. It also entails the interplay between different stakeholders of a corporation, viz., board of directors, equity holders, debtholders, employees, customers and gove rnment.

It deals with how a company fulfils its obligations to investors and other stakeholders. It is about creating shareholder wealth while ensuring a fair play to all other stakeholders and society at large. Stakeholders mean people other than shareholders who have significant interest in the company. They can be creditors, employees of the company, government, society etc. In a company, shareholders are the owners of the company and their responsibilities lie in selecting the Board of Directors. Board of Directors is a formal body responsible for the governance of corporate functions. They review the affairs of the company and direct them. Good corporate governance is the outcome of logical and

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rational decision taken at the board level. It requires board members of all five shareholders, independent public member and executives from banks, financial institutions, government organizations etc.

2.2.1 CORPORATE GOVERNANCE IN INDIAN CONTEXT

In India the concept of corporate governance is gaining importance because of two reasons.

A) After liberalization, there has been institutionalization of financial markets, FIIs, FIs and mutual funds become dominant players in the stock markets. The market began to discriminate between wealth destroyers. Corporate governance is a critical byproduct of market discipline.

B) Another factor is the increased role being played by the private sector. Companies are realizing that shareholders love to stay with those corporate that create values for their shareholders. This is only possible by adopting fair, honest and transparent corporate practices. 2.2.2 INDIAN CORPORATE GOVERNANCE FRAMEWORK6 Indias legal framework for corporate governance is found in the Companies Act of 1956, most recently amended in 2002, and in Clause 49 of SEBIs requirements for listed companies. . 2.2.3 A BRIEF HISTORY [PRE- LIBERALIZATION i.e. PRE-1991]

The historical development of Indian corporate laws are marked with many interesting contrasts. For example at independence, India inherited one of the world's poorest economies but it had a factory sector which accounted for a tenth of the national product. India also had

four functioning stock markets and a banking system which had well-developed lending norms & recovery procedure.

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Corporate development in India was marked by the managing agency system, which contributed to the birth of dispersed equity ownership & also gave rise to the practice of management enjoying controlling rights disproportionately greater than their stock ownership. The enactment of 1951 Industries (Development & Regulation) Act & the 1956 Industrial Policy Resolution marked the beginning of a regime & culture of protection, licensing & red tape that encouraged corruption & stilted the growth of the Indian corporate sector. Soon, corruption, nepotism & inefficiency became the hallmark of Indian corporate sector. The corporate bankruptcy & reorganisation system was also not free from problems. In this regard, we should consider the SICA or the Sick Industrial Companies Act 1985 & the Board for Industrial & Financial Reconstruction (BIFR). Only a few companies emerged successfully from the BIFR & the legal process on average took more than 10 years by which the assets of the company were virtually worthless. Thus, protection of the creditors' rights existed only in paper & the bankruptcy process was featured among the worst in the World Bank survey on business climate Again, although the Companies Act provided clear instruction for maintaining & updating share registers but in reality minority shareholders often suffered from irregularities in share transfers & registrations Thus it can be concluded that for most of the pre-liberalization era the Indian equity markets were not sophisticated enough to exert effective control over the companies. Listing requirements of exchanges provided some transparency but non-compliance was not rare & was also not punished.

2.2.4 [POST- LIBERALIZATION i.e. POST- 1991]: Liberalization of the Indian economy began in 1991. Since then, there has been major changes in both laws & regulations & in the corporate governance landscape. (a) The most important development in the field of corporate governance & investor protection has been the establishment of the Securities & Exchange Board of India (SEBI) in 1992. It has played a crucial role in establishing the basic minimum ground rules of corporate conduct in India.

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(b)

(b) The next significant event was the Confederation of Indian Industry (CII) Code for Desirable Corporate Governance developed by a committee chaired by Rahul Bajaj . The committee was formed in1996 & it submitted it's recommendation on April 1998.

(c)

Later two more committees were constituted by SEBI, one chaired by Kumar Mangalam Birla & the other by Narayana Murthy. The Birla committee submitted its report on early 2000 & the second committee submitted its report on 2003.The recommendation of these two committees had been instrumental in bringing major changes in the corporate governance through the formulation of Clause 49 of the Listing Agreement.

(d)

Along with SEBI, the Department of Company Affairs & The Ministry of Finance , Government of India, also took some initiatives for improving corporate governance in India. For example, the establishment of a study group to operationalize the Birla Committee recommendations in 2000, the Naresh Chandra Committee on Corporate Audit & Governance in 2002 & the Expert Committee on Corporate Law (J.J. Irani Committee) in late 2004.

(e)

SEBI implemented the recommendations of the Birla Committee through the enactment of Clause 49 of the Listing agreement. Clause 49, can be referred to as a milestone with respect to the changes in corporate governance in India. It is similar to Sarbanes - Oxley Act (SOX) in U.S. Clause 49 looks into the following matters : (i) Composition of the board of the directors. (ii) Composition & Functioning of the Audit Committee. (iii) Governance & disclosures regarding subsidiary companies. (iv) Disclosures by the company. (v) CEO/CFO certification of the financial results.

(vi) Reporting on corporate governance as part of the annual report. (vii) Certification of compliance of a company.

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(f)

The National Foundation for Corporate Governance (NFCG) was formed by the Ministry of Corporate Affairs, Govt. of India, in partnership with Confederation of Indian Industry (CII), Institute of Chartered Accountants of India (ICAI) & Institute of Company Secretaries of India (ICSI) with the goal of promoting better corporate governance practices in India.

2.2.5 ISSUES IN CORPORATE GOVERNANCE IN INDIA:

Corporate governance has been a topic of hot debate in developed countries like U.K. & U.S.A. for the last two decades. With the opening up of economies ,it has also been a concern for developing country like India. This is because, opening up of economies has changed the scenario of Indian market i.e. on one hand, it has made the world market accessible to the Indian corporates & on the other hand, it has increased competition in the domestic market with the advent of the multinational companies. In this changed scenario, the quality of governance has been an important factor not only for survival of the companies but also for influencing the company's ability to raise money from capital market. y Corporate governance is also important in Indian context because of the scams that occurred since liberalisation from 1991, for e.g. the UTI scam, Ketan Parekh scam , Harshad Mehta scam & the latest & the biggest of them all the Satyam Fraud scam . y Another reason, is that in emerging market like India when investments take place investors want to verify that not only are the capital markets or the companies on which they have invested run competently but they also have good corporate governance. y Another reason, is that it is believed that poor transparency & corporate governance norms were one of the main reasons for the Asian crisis in 1997. And also because such crisis have huge impact on the economy which can set a country several years back in its path to development.

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Another reason, is that the legal & administrative environment in India provide excellent scope for corrupt practices in business.

THE SATYAM FRAUD CASE : In one of the biggest frauds in India's corporate history, B. Ramalinga Raju, founder & CEO of Satyam Computers, India's fourth largest IT services firm announced on January 7th, 2009 that his company has been falsifying accounts for years, overstating revenues & inflating profits by $ 1 billion. The Satyam scam had been referred to as India's Enron'. The admission of committing fraud & resignation by Raju showed that the company had been feeding investors, shareholders, clients & employees a steady diet of untruth with respect to its financial performance. Raju said in a letter addressed to the board, the stock exchanges & SEBI that Satyam's profit was inflated over several years to unmanageable proportions & that it was forced to carry more assets & resources than its real operations.

Satyam fraud case had laid bare the complete lack of accountability in the company & prompted questions about corporate governance practices of the company.

(A) ROLE OF THE BOARD:

Among the many shortcomings of the Satyam episode, the most significant one has been the role of the independent directors who were supposed to safeguard the interest of all stakeholders. While the three committees had explicitly mentioned the role, independence, remuneration & responsibilities of independent directors the same did not translate into action but was only on paper. (B) ROLE OF AUDITORS:

Although maximum focus in the Satyam episode was on the role of the independent directors, experts believe the role of the auditors in this case Pricewaterhouse Coopers should also be taken into account. A major reason for the fallout of the Satyam case was the issue related to the delay
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in implementation of Indian corporate laws. According to N.K. Jain , secretary & CEO of the Institute of Company Secretaries of India, the need of the hour is to enforce corporate laws in transparent, swift & uniform fashion.

(C)

MINORITY SHAREHOLDERS :

According to experts, institutional investors have the tools, bandwidth & clout to extract information & play an activist role in ensuring that management don't go off track. If institutional investors act collectively they can demand the required change in the companies they have invested.although independent directors play an important role in ensuring better risk management, it is the demand for good governance by institutional shareholders which is the best driver towards higher governance standards.

2.2.6 CORPORATE GOVERNANCE AND ITS VALUE:The company is committed to follow the best practices in the area of corporate governance. The company believes that proper corporate governance facilitates effective management and control of business. This, in turn, enables the company to deliver the optimum results to all its stakeholders. The objectives can be summarized as : y y To enhance shareholders value. To protect interests of shareholders and othe r stakeholders including customers, employees and society at large. y To ensure transparency and integrity in communication and to make available full, accurate and clear information to all concerned. y y To ensure accountability for performance and to achieve excellence at all levels. To provide corporate leadership of highest standard for others to emulate.

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2.2.7 THE NEED FOR IMPROVEMENT IN INDIAN CORPORATE GOVERNANCE PRACTICES7 The Satyam scandal stunned the Indian business community and shook the confidence of foreign investors in Indian corporate governance. Naturally, questions have since been raised about investing in a country where corporate governance standards have apparently not kept pace with a rapid rise in economic power. This is unfortunate because the scandal occurred against a backdrop of steadily improving governance practices in India. However, to be sure, further reforms are still needed in certain critical areas. India has enacted numerous reforms in corporate governance, especially in the area of company boards, independent directors, and disclosure and accounting standards, certain critical areas, such as shareholder meeting and voting procedures, regulation of affiliate transactions, issuance of preferential warrants, and quality of corporate disclosures, are in need of further improvement. Arguably, corporate governance problems are prevalent in India because Indian business culture has not kept abreast of economic and regulatory changes in the market. First, many Indian businesses are old family establishments and while controlling shareholders may welcome cash infusions by outside investors, they may hesitate to relinquish control. Second, punitive tax rates which peaked during the 1970s encouraged widespread tax evasion. While the gradual lowering of corporate tax rates led to the abatement of questionable practices, some habits of old likely continue. To be sure, not all companies indulge in such practices and top Indian companies generally strive to have good governance procedures in place. For instance, Infosys is widelyknown as having an excellent reputation when it comes to corporate governance. Many of the problems with the Indian governance structure is not from lack of compliance with existing rules, but from the inadequacy of some of the rules themselves. Both regulators and companies are therefore well-advised to enact further reform.

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3 ROLE OF GOVERNANCE8

THE

ACCOUNTING

IN

CORPORATE

The accounting profession play a critical role in corporate governance through their attesting function and their perceived responsibility of ensuring transparency in accounting and reporting It is interesting that the accounting profession in the UK. and India, together with two other bodies, took the lead in setting up the Cadbury Committee whose terms of Status of Accounting profession reference specifically included, among others an examination of the rote and responsibility of auditor and audits, This in testimony enough of the importance of accounting profession in any system of corporate governance Some of the aspects of corporate governance that directly concern the Accounting procession are as under:

Financial statement are among the most important means of reflecting the economic performance of business enterprise. Accounting records economic transistors, measures results, and assigns value to assets and liabilities at a practical point of time. Investors and others, therefore extensively rely upon accounting information while taking economic decisions. Shareholders appoint auditors to get an independent external assurance that the information presented in financial statements reflects a true and fair representations of the facts. Shareholders rely on auditors judgement because of their expert knowledge and independence. The profession loses its credibility and public confidence if it fails to demonstrate its competence and independence. This might happen if the ignores and changing societal needs, fails to develop improved audit practices and techniques to better discharge its responsibility, or allows its independence to become suspect due to any reason. The study of practices of accounting standards is an important and relevant issue of good Corporate Governance in the present environment, as the standards are viewed as a technical response to call for better financial accounting and reporting; or as a reflection of a societys changing expectations of corporate behavior and a vehicle in social and political monitoring and control of the enterprise.

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In India accounting standards are inadequate, as a result the disclosure is ineffective, which is a negative phenomenon to a country which wishes to be a global player as it cannot hope to tap the GDR market with inadequate financial disclosures, since the more transparent activities of a

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company governed by the proper accounting standards, the more accurately will its securities be valued. The old ways of selective and conservative reporting is yielding place to more transparent and voluntary disclosures, in tune with the changing times. Therefore, there is no alternative to adopting by the corporate entities of new standards of accountability, where the accountability is largely a matter of disclosure, of transparency, of explaining a companys activities to those to whom the company has responsibilities i.e. the disclosure in simple, understandable and comparable form, forms clearly the basis for accountability, which can be provided only if companies adopt uniform accounting policies and disclose adequate information about the accounting standards followed. Thus, accounting standards ensure the comprehensive disclosure of the corporate's accountability, which may be regarded as a prime issue and a pre requisite for good Corporate Governance.

3.1 TRANSPARENCY AND DISCLOSURE

In any country, the awareness and competitiveness among the corporates would be strengthened when they understand each other and compare their performance, for which the simple, understandable and comparable disclosure is an important instrument. The main objective of disclosure would be fulfilled and the utility of the disclosure towards good Corporate Governance would be improved when the disclosure is done on the basis of uniform and consistent accounting standards. Thus, the development and the practice of uniform accounting standards is an essential essence of Corporate Governance, for which various bodies have been thinking to strengthen the standards to make the Corporate Governance more effective in the context of the changing corporate environment and contributed their wisdom. The corporate management is also now feeling the pressure for reforming accounting practices and level of transparency emanating from alert lenders, regulatory agencies, financial analyst and above all board of directors who realize that it is the quality of information which will determine how efficiently they have discharged their responsibilities towards the good Corporate Governance. Good governance is necessarily transparent governance and vice versa. With the growth of financial press and equity research the days of opaque accounting and reporting are coming to an end. Moreover when the companies sourcing funds credible to deny similar information to
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Indian investor. For transparency in corporate governance the decision making done in the closets of board rooms, the sanctum sanctorium should be in open and free environment and socially responsible manner. The issues, stakes and considerations should be examined in depth with seriousness they deserve and decisions should be taken independently and objectively. For the necessary information should be made available to the board and its committees in time. Improvement in accounting and reporting is a necessary condition of improvement in corporate governance. Absolute transparency in accounting may be difficult to achieve. However, apart from meeting the statutory requirement, standards accounting practices with limited discretion should be adopted. In the process of accounting, apart from the considerations like relevance, materiality, prudence, understandability, substance over from it should be ensured that the output is reliable, complete, objective and a faithful presentation of the reality. In this respect the OECD Principles of Corporate Governance have emphasized that timely and accurate information should be disclosed on all matters regarding the financial situation, performance, ownership and governance of the company

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3.2 ISSUES:
i) The requirement of AS-1 is only to disclose the material facts, what is the material or immaterial it would be decided by the organization, where the influence of personal judgement is expected in the absence of concrete guidelines. Therefore, the existence of AS-1 is doubtful.

ii) In few accounting standards, such as, valuation of inventories and depreciation accounting, the alternative accounting treatment is allowed. This kind of flexibility creates problems in judging the quality and reliability of financial statements of an enterprise and the different methods are followed for different companies or for different periods, the possibility of interunit, intra-industry or inter-period comparison is impaired. The lack of comparability renders the financial information less useful and creates confusion in the minds of the investing public.

iii) Some of the accounting standards are more in the nature of disclosure than accounting requirements. For example, AS-5 requires a separate disclosure of prior period items and it does not provide the mechanism to estimate the impact of prior period items on current years operation. iv) In case of construction contracts, AS-7 provides for adoption of either completed contract method or percentage of completion method for recognition of profit on completed contract, which attracts the same limitation of comparability. v) The hybrid method of accounting i.e. accounting for income on cash basis and expenditure on accrual (mercantile basis), followed by corporates, conveniently allows them to manipulate their reports. vi) The all IAS are not adopted by IASB for India. Just 15 standards adopted out of 33 IAS, left the various fields as un covered. vii) The standards setting process is closed and narrow and the execution is unsound, that causes the various practices and imperfect disclosure, which defeats the prime objective of accounting standards in achieving the good Corporate Governance.

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4. CONCLUSION

The Accounting Standards guide the management in preparation and presentation of financial statements within the permissible assumptions and make disclosures thereof. the Accounting Standards insist on transparency Say What You Do And Do What You Say and if correctly interpreted and applied it would go a long way in securing the interests of investors and other stakeholders.

Indian companies are increasingly accessing the global markets to meet their capital needs by listing their securities on the stock exchanges outside India. To be able to communicate and effectively engage with the world we need a common language that is understood by every market in the world. This was the main objective of converging the national accounting standards with IFRS.. The use of globally acceptable accounting framework helps in promoting investors confidence and brings more clarity and uniformity for users of financial statements

The use of standardised accounting practices helps in mitigating the problem of information asymmetry between various stakeholders such as managers, owners and creditors. While managers have the incentive to be more forthcoming on good news about the companys performance and prospects, they may want to hold back bad news. The accountants as information intermediaries between managers and shareholders need to identify and recognise losses at an early stage, thereby mitigating asymmetry in information. Accounting standards have to be based on principles, be uniformly applied and assist in presenting the true picture of the financial health of the company, while ensuring accountability in all respects. This will help in avoiding unknown risks and allow everyone to have a fair assessment of the company. If financial performance is volatile, the function of a sound accounting procedure is to report the volatility.

The responsibility for corporate governance is multilayered. Within a company internal audit department is the proverbial foot soldier to detect and prevent fraud on a day to day basis. The Board of Directors have the ultimate responsibility for in-house oversight. At the external level there are several components like market regulators, external auditors, tax authorities, banks and financial institutions besides investor groups or associations.
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Providing essential financial information on a companys performance to its shareholder and other stakeholders is an integral and important part of good corporate governance

. However, inadequacies in the system have surfaced more often than not in the recent past violating the credibility of reported financial data and governance in the private sector. Each such incident has in turn led to the adoption of more stringent and transparent regulations and renewed the call for better governance measures.

Historically, various accounting measures have been used as tools for control for equitable appropriation of stakeholder wealth. The strategic use of accounting practices for effective control and better governance requires greater in-depth exploration. This is also expected to have wider implications in preventing the occurrence of fraud and misrepresentation. Furthermore, the role of good governance practices and their influence on improving the quality of accounting information needs closer examination. It may thus be said that although accounting and governance share common goals there is great scope to develop better appreciation of the inter-relationships between these fields

Thus , it can be concluded that while corporate governance framework in the country is seen at par with the developed countries the same has to be implemented in letter as well as spirit. Also, we should approach corporate governance issues in India not merely from the point of view of the Companies Act or the guidelines issued by Birla committee, Murthy Committee, but look at the entire network of various rules & regulations impinging on business so that an integrated wholistic system is created to ensure that transparency & good corporate governance prevails.

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6. SUGGESTIONS:
y The most important suggestion for improving the situation is the wide acceptance of accounting standards in practice.not only in letter but in spirit too. y The Ministry of Company Affairs, SEBI, ICAI and various investor protection

organisations shall have to work out the manner in which the shareholders get more information and even a lay person can understand the impact of the following, with a view to avoid recurrence of corporate frauds. y The ASB in consultation with other professionals and regulatory bodies should evolve some mechanism to limit the scope of alternative methods available within an accounting standard. Thus,the use of uniform accounting standards would enhance the qualitative and comparability dimensions of financial statement and reporting. y The establishment of harmony among the applicable laws like Companies Act, Income Tax Act, Banking Regulations etc., which have significant bearing on different items of financial statements, would give true and fair view of business. y The formulation of standards, particularly in the areas in which it does not exist to day like accounting for leases, segment accounting, accounting for joint ventures, earning per share, investment in subsidiaries, associates etc. useful to make accounting standards more user friendly and international acceptable. y SEBI should develop adequate expertise for analysing financial statements so that it is able to detect fraud in the financial statements in the future. y The Institute of Chartered Accountants of India ( ICAI )or the Government should encourage the development of a whistle-blowing committee so that anybody who finds anything doubtful or fishy about a company should report against the same immediately to the committee . y y SEBI should reconsider its financial disclosure norms Also Bankers & Rating Agencies should also be allowed to analyse the financial statements for detecting fraud.

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The ICAI should implement a rule, indicating that audit firms should be allowed to work as auditors of large companies for a period of two years on a rotation basis in order to avoid undue influence committed by the audit forms.

The Benami Transaction Prevention Act & The Prevention of Money Laundering Act, should be encouraged in order to prevent fraudulent activities & also to ensure that corrupt practices are effectively punished.

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6 BIBLIOGRAPHY:
6.1BOOKS
y y y y y Indian accounting standards-A. K. Bhattacharya International accounting-A. K. Das mahopatra Corporate governance in India-Sunita Sharma Corporate governance,policies and practices: A.C. Fernando Corporate governance in India-S.C. Das

6.2 WEB-SITES VISITED

y y y y y y y y y y y y
y

http://www.supersystems.in/bank/accounting1.htm http://www.icai.org http://www.asiatradehub.com http://ezinearticles.com http://moneybol.com http://www.nos.org http://www.ehow.com http://barandbench.com http://www.icai.org http://www.articlesbase.com http://scribd.com http://management pradise.com
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