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Submitted to: Prof.Pawan Submitted by: Naveen Swaroop B(10-01)


Existing evidence suggests that the Sarbanes-Oxley Act (SOX) is beneficial to U.S. investors, but that foreign firms are perhaps less likely to list in the U.S. after SOX. This raises the question of whether foreign firms avoid listing in the U.S. after SOX because the Act imposes unnecessary costs upon firms. The objective of this act is to reconcile the U.S. and international evidence by distinguishing between the effect of SOX on controlling shareholders and managers of foreign firms and the effect on minority investors of these firms. Our results suggest that insiders of foreign firms believe that the regulation makes the extraction of value from minority investors more difficult and costly for them. Outside investors in foreign firms, on the other hand, seem on average to believe that SOX is beneficial to them. The combination of these results reconciles the existing U.S. and international evidence regarding SOX.


Brief about Sarbanes Oxley act: The year 2001 saw the largest and most spectacular bankruptcy in American history up to that time: the Enron debacle. The collapses of Tyco and WorldCom were not far behind, and hundreds of thousands of investors lost millions upon millions of dollars. Investor confidence was badly shaken, and this spurred Congress to improve the accuracy and reliability of corporate disclosures. The Sarbanes-Oxley Act was created to protect investors from corporate accounting fraud. Named after its sponsors, Sarbanes and Oxley, it is variously referred to as "SOX" and "Sarbox," but its official name is the Public Company Accounting Reform and Investor Protection Act of 2002. It is considered by many to be the biggest overhaul of U.S. securities regulations since the New Deal. Here are the major provisions of the act:

Chief executives and financial officers are held responsible for their companies financial reports. Executive officers and directors may not solicit or accept loans from their companies. Insider trades are reported more quickly. Insider trades are prohibited during pension-fund blackout periods. Disclosure of executive compensation and profits is mandatory. Internal audits and review and certification of audits by outside auditors are mandatory. There will be criminal and civil penalties for securities violations. There will be longer jail sentences and larger fines for executives who intentionally misstate financial statements. Audit firms may no longer provide actuarial, legal, or consulting services to firms they audit. Publicly traded companies must establish internal financial controls and have those controls audited annually.

This last provision is of concern primarily for large companies and is commonly referred to as "SOX 404 compliance." It requires publicly traded companies to institute comprehensive internal controls on their finances as well as have their policies regularly reviewed by outside firms. While this might not affect your small business, it is having a significant impact on big ones. Companies with revenue of more than $5 billion are spending an average of $4.3 million just to achieve SOX 404 compliance.

Unless you are planning on taking your small company public very soon, Sarbanes-Oxley probably does not have any repercussions for your business. However, if you're an investor, SOX might allow you to sleep a little easier. ENRON COLLAPSE Overview of Enron Scandal Enron Corporation is an energy trading, natural gas, and electric utilities company based in Houston, Texas that employed around 21,000 people by mid-2001, before it went bankrupt. Fraudulent accounting techniques allowed it to be listed as the seventh largest company in the United States, and it was expected to dominate the trading it had virtually invented in communications, power, and weather securities. Instead, it became the largest corporate scandal in history, and became emblematic of institutionalized and well-planned corporate fraud. Enron cynically and knowingly created the phony California electricity crisis of 2000 and 2001. There was never a shortage of power in California. Using tape recordings of Enron traders on the phone with California power plants, the film chillingly overhears them asking plant managers to "get a little creative" in shutting down plants for "repairs." Between 30 per cent and 50 per cent of California's energy industry was shut down by Enron a great deal of the time, and up to 76 per cent at one point, as the company drove the price of electricity higher by nine times. Its European operations filed for bankruptcy on November 30, 2001, and it sought Chapter 11 protection in the U.S. on December 2. Enron's global reputation was undermined, by persistent rumours of bribery and political pressure to secure contracts in Central and South America, in Africa, and in the Philippines. Especially controversial was its $30 billion contract with the Maharashtra State Electricity Board in India, where it is alleged that Enron officials used political connections within the Clinton and Bush administrations to exert pressure on the board. On January 9, 2002, the United States Department of Justice announced it was going to pursue a criminal investigation of the Enron scandal and Congressional hearings began on January 24. After a series of scandals involving irregular accounting procedures bordering on fraud involving Enron and its accounting firm Arthur Andersen, it stood at the verge of undergoing

the largest bankruptcy in history by mid-November 2001. A white knight rescue attempt by a similar, smaller energy company, Dynegy, was not viable. During 2001, Enron shares fell from US$85 to US$0.30. As Enron was considered a blue chip stock, this was an unprecedented and disastrous event in the financial world. Enron's plunge occurred after it was revealed that many of its profits and revenue were the result of deals with special purpose entities. The result of this accounting scandal was that many of the losses that Enron encountered were not reported in its financial statements. Following the 2001 bankruptcy filing, Enron has been attempting to restructure in order to compensate as many creditors as possible. Enron's innovative core energy trading business was sold early in the bankruptcy proceedings to Merrill Lynch and Company. A last-ditch survival attempt was made in 2002 through a planned merger with arch-rival Dynegy Corporation. Dynegy backed out during merger talks, acquiring control of Enron's original, predecessor company- Northern Natural Gas- in the process. Enron is currently pursuing legal action against Dynegy over the takeover of Northern Natural Gas, which has since been sold by Dynegy to MidAmerican Energy Holdings Company. Enron's final bankruptcy plan provides for the creation of three new businesses to be spun off from Enron as independent, debt-free companies. The reorganization process commenced in 2003, with the formation of two new Enron subsidiaries, Cross-country Energy L.L.C., and Prisma Energy International Inc.

The Act The Act contains 11 titles, or sections, ranging from additional Corporate Board responsibilities to criminal penalties, and requires the Securities and Exchange Commission (SEC) to implement rulings on requirements to comply with the new law. The Act establishes a new quasi-public agency, the Public Company Accounting Oversight Board, or PCAOB, which is charged with overseeing, regulating, inspecting, and disciplining accounting firms in their roles as auditors of public companies. The Act also covers issues such as auditor independence, corporate governance, internal control assessment, and enhanced financial disclosure. However, there is a heated debate on whether the benefits are comparable to the cost incurred in the implementation of the Act. Some feel that the legislation is necessary and will definitely help restoring public confidence in nation's capital market, will help control the corporate accounting and strengthen the accounting creditability of public accounting firms and others.

The Detractors contend that SOX was an unnecessary and costly government intrusion into corporate management that places U.S. corporations at a competitive disadvantage vis-a-vis foreign firms.

TITLE IPUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD Title I consists of nine sections and establishes the Public Company Accounting Oversight Board, to provide independent oversight of public accounting firms providing audit services ("auditors"). It also creates a central oversight board tasked with registering auditors, defining the specific processes and procedures for compliance audits, inspecting and policing conduct and quality control, and enforcing compliance with the specific mandates of SOX. Sec. 101. Establishment; administrative provisions. Sec. 102. Registration with the Board. Sec. 103. Auditing, quality control, and independence standards and rules. Sec. 104. Inspections of registered public accounting firms. Sec. 105. Investigations and disciplinary proceedings. Sec. 106. Foreign public accounting firms. Sec. 107. Commission oversight of the Board. Sec. 108. Accounting standards. Sec. 109. Funding.

TITLE IIAUDITOR INDEPENDENCE Title II consists of nine sections and establishes standards for external auditor independence, to limit conflicts of interest. It also addresses new auditor approval requirements, audit partner rotation, and auditor reporting requirements. It restricts auditing companies from providing non-audit services (e.g., consulting) for the same clients. Sec. 201. Services outside the scope of practice of auditors. Sec. 202. Preapproval requirements. Sec. 203. Audit partner rotation. Sec. 204. Auditor reports to audit committees. Sec. 205. Conforming amendments. Sec. 206. Conflicts of interest. Sec. 207. Study of mandatory rotation of registered public accounting firms. Sec. 208. Commission authority. Sec. 209. Considerations by appropriate State regulatory authorities. TITLE IIICORPORATE RESPONSIBILITY Title III consists of eight sections and mandates that senior executives take individual responsibility for the accuracy and completeness of corporate financial

reports. It defines the interaction of external auditors and corporate audit committees, and specifies the responsibility of corporate officers for the accuracy and validity of corporate financial reports. It enumerates specific limits on the behaviors of corporate officers and describes specific forfeitures of benefits and civil penalties for non-compliance. For example, Section 302 requires that the company's "principal officers" (typically the Chief Executive Officer and Chief Financial Officer) certify and approve the integrity of their company financial reports quarterly Sec. 301. Public company audit committees. Sec. 302. Corporate responsibility for financial reports. Sec. 303. Improper influence on conduct of audits. Sec. 304. Forfeiture of certain bonuses and profits. Sec. 305. Officer and director bars and penalties. Sec. 306. Insider trades during pension fund blackout periods. Sec. 307. Rules of professional responsibility for attorneys. Sec. 308. Fair funds for investors. TITLE IVENHANCED FINANCIAL DISCLOSURES Title IV consists of nine sections. It describes enhanced reporting requirements for financial transactions, including off-balance-sheet transactions, pro-forma figures and stock transactions of corporate officers. It requires internal controls for assuring the accuracy of financial reports and disclosures, and mandates both audits and reports on those controls. It also requires timely reporting of material changes in financial condition and specific enhanced reviews by the SEC or its agents of corporate reports. Sec. 401. Disclosures in periodic reports. Sec. 402. Enhanced conflict of interest provisions. Sec. 403. Disclosures of transactions involving management and principal stockholders. H. R. 37632 Sec. 404. Management assessment of internal controls. Sec. 405. Exemption. Sec. 406. Code of ethics for senior financial officers. Sec. 407. Disclosure of audit committee financial expert. Sec. 408. Enhanced review of periodic disclosures by issuers. Sec. 409. Real time issuer disclosures. TITLE VANALYST CONFLICTS OF INTEREST Title V consists of only one section, which includes measures designed to help restore investor confidence in the reporting of securities analysts. It defines the codes of conduct for securities analysts and requires disclosure of knowable conflicts of interest. Sec. 501. Treatment of securities analysts by registered securities associations and national securities exchanges.

TITLE VICOMMISSION RESOURCES AND AUTHORITY Title VI consists of four sections and defines practices to restore investor confidence in securities analysts. It also defines the SECs authority to censure or bar securities professionals from practice and defines conditions under which a person can be barred from practicing as a broker, adviser or dealer. Sec. 601. Authorization of appropriations. Sec. 602. Appearance and practice before the Commission. Sec. 603. Federal court authority to impose penny stock bars. Sec. 604. Qualifications of associated persons of brokers and dealers. TITLE VIISTUDIES AND REPORTS Title VII consists of five sections and requires the Comptroller General and the SEC to perform various studies and report their findings. Studies and reports include the effects of consolidation of public accounting firms, the role of credit rating agencies in the operation of securities markets, securities violations and enforcement actions, and whether investment banks assisted Enron, Global Crossing and others to manipulate earnings and obfuscate true financial conditions. Sec. 701. GAO study and report regarding consolidation of public accounting firms. Sec. 702. Commission study and report regarding credit rating agencies. Sec. 703. Study and report on violators and violations Sec. 704. Study of enforcement actions. Sec. 705. Study of investment banks. TITLE VIIICORPORATE AND CRIMINAL FRAUD ACCOUNTABILITY Title VIII consists of seven sections and is also referred to as the Corporate and Criminal Fraud Act of 2002. It describes specific criminal penalties for fraud by manipulation, destruction or alteration of financial records or other interference with investigations, while providing certain protections for whistle-blowers. Sec. 801. Short title. Sec. 802. Criminal penalties for altering documents. Sec. 803. Debts nondischargeable if incurred in violation of securities fraud laws. Sec. 804. Statute of limitations for securities fraud. Sec. 805. Review of Federal Sentencing Guidelines for obstruction of justice and extensive criminal fraud. Sec. 806. Protection for employees of publicly traded companies who provide evidence of fraud. Sec. 807. Criminal penalties for defrauding shareholders of publicly traded companies. TITLE IXWHITE-COLLAR CRIME PENALTY ENHANCEMENTS Title IX consists of two sections. This section is also called the White Collar Crime

Penalty Enhancement Act of 2002. This section increases the criminal penalties associated with white-collar crimes and conspiracies. It recommends stronger sentencing guidelines and specifically adds failure to certify corporate financial reports as a criminal offense. Sec. 901. Short title. Sec. 902. Attempts and conspiracies to commit criminal fraud offenses. Sec. 903. Criminal penalties for mail and wire fraud. Sec. 904. Criminal penalties for violations of the Employee Retirement Income Security Act of 1974. Sec. 905. Amendment to sentencing guidelines relating to certain white-collar offenses. Sec. 906. Corporate responsibility for financial reports. TITLE XCORPORATE TAX RETURNS Title X consists of one section. Section 1001 states that the Chief Executive Officer should sign the company tax return. Sec. 1001. Sense of the Senate regarding the signing of corporate tax returns by chief executive officers. TITLE XICORPORATE FRAUD AND ACCOUNTABILITY Title XI consists of seven sections. Section 1101 recommends a name for this title as Corporate Fraud Accountability Act of 2002. It identifies corporate fraud andrecords tampering as criminal offenses and joins those offenses to specific penalties.It also revises sentencing guidelines and strengthens their penalties. This enables theSEC to temporarily freeze large or unusual payments. Sec. 1101. Short title. Sec. 1102. Tampering with a record or otherwise impeding an official proceeding. Sec. 1103. Temporary freeze authority for the Securities and Exchange Commission. Sec. 1104. Amendment to the Federal Sentencing Guidelines. Sec. 1105. Authority of the Commission to prohibit persons from serving as officers or directors. Sec. 1106. Increased criminal penalties under Securities Exchange Act of 1934.

Emergence of SOX act

Sarbanes Oxley Act of 2002 was passed after a public demand which grew due to the scandalous exposure of several high level financial scandals in which a number of big corporate giants were involved. A number of Fortune 500 companies were found involved in these scandals and the investor confidence, had hit rock bottom. The purpose of Sarbanes Oxley Act was to empower the Securities and Exchange Commission of the U.S. so that it can keep an eye on the corporate governance and the investor's confidence in the market shall be reinstated.


Despite overflowing amounts of legalese, there are two major purposes of the Sarbanes Oxley Act. They are to ensure transparency and accountability by implementation of Sarbanes oxley compliance. These purposes are to be fulfilled at the pain of fine or punishment or both. President Bush informed that no law of such significance to businesses has been signed since the presidency of Franklin D. Roosevelt in the U.S. which reflected the significance of this act. Main Purpose The main purpose of Sarbanes Oxley Act is to ensure that the corporate sector works with transparency and provides full disclosure of information as and when required. The transparency purpose of Sarbanes Oxley Act is fulfilled by ensuring real time disclosure of information, the adherence to guidelines of the Generally Accepted Accounting practices, full financial details being made available of all the transactions not mentioned in balance sheet. This purpose of Sarbanes Oxley Act is also fulfilled by an expanded disclosure of financial and non-financial control measures in force in every company. Similarly, public certification of these internal controls and financial measures also helps fulfil the purpose of Sarbanes Oxley Act. An increased set of responsibilities delegated to the audit committee also help fulfil the purpose of Sarbanes Oxley Act. Similarly in order to fulfil the requirements of the Sarbanes Oxley Act, the public auditors are put under increased regulatory control of the Securities and Exchange Commission which has newly formed the Public Company Accounting Oversight Board for this purpose. The goals of SOX were far reaching and it may not be easy to pinpoint all the accomplishments achieved by this legislation. One of the most crucial goals targeted by this act was to restore investor confidence in the capital markets as well establish integrity within the markets (Shakespeare, Journal of Business & Technology Law: 335). The reform contained in the act addressed almost every aspect of the country's capital markets by addressing the roles of all reporting companies, foreign and domestic as well as stipulating conduct for their directors and officers. According to Donaldson, (2005) who was then the chairman of the Securities and exchange committee, SOX objectives could be grouped into 5 major themes as follows: 1. To restore and strengthen public confidence in auditing 2. To improve and enhance executive responsibility making them more responsible and prudent. 3. To strengthen the enforcement of federal security laws 4. To improve financial reporting and disclosure 5. To improve the performance of watchdog institutions such as research analysts, accounting firms and attorneys (Securities and Exchange Commission, 2009, p 1).

Advantages of Sarbanes-Oxley:

To reduce disclosure process cost, enhance internal controls management productivity, and increase investor confidence.


Investors are able to evaluate the process and performance of the Management stewardship responsibilities and the reliability of a companys financial statements. Increases the responsibility of the management for the companys financial statement. Improved disclosure helps company to detect fraudulent financial reporting earlier and minimizes its adverse effects. As the quality and accountability of the financial reporting increases investor confidence, which ultimately results in increased efficiency and competitiveness of the capital markets? Establishes and maintains the internal control structure. To develop and manage the overall process of compliance and permit faster reaction to problematic compliance areas. Decreases the risk of financial fraud, decreases errors and improves the accuracy of financial reports. Ensures the accountability of individuals involved in financial reports and operations. Creates a process for report certification. Automate corporate financial reporting and disclosure requirements of sections 404 and 302. Provide a foundation architecture that merges collaboration, workflow, document management and publishing to create compliance processes to manage business processes efficiently and effectively. Provide powerful document and process management with flexible reporting capabilities. To monitor and provide Portals, Dashboards and Scorecards to help the managers to sustain compliance. Can reduce the cost of SOX compliance by avoiding manual, people intensive process, (internal employees and external consultants) and reduce external audit costs. Avoids higher penalties to be paid to the Federal Government. Provides opportunities to Registered Accounting firms, Information technologists, and other persons in the field of accounts.


Companies have better internal control environments as a result of Sarbanes-Oxley. This will lead to more accurate information being available to investors who are more confident in making investing decisions. All participants in financial reporting have increased responsibilities and consequences for not living up to those responsibilities.


The legislation was passed without any specific guidance to companies as to how it should be implemented. As a result, each company had to create its own methodology for ensuring compliance, which was inefficient and expensive. There continues to be a significant difference between what the SEC and Public Company Accounting Oversight Board are saying publicly -- that they want the process to be more efficient -- and how the PCAOB inspectors are conducting their reviews -- at a very detailed level, which is not helping auditors reduce their efforts. Smaller companies that are audited by the Big Four will have to pay higher audit fees even if they are not subject to Sarbanes-Oxley as the additional audit requirements of SarbanesOxley creep into their methodologies. Many private companies and smaller public companies


are realizing that the Big Four have designed their audits to serve the Fortune 500 companies and that this model is slow and expensive.

Risk inherent in the corporation

The Sarbanes-Oxley Act of 2002 (SOX) was passed to prevent companies from engaging in accounting fraud similar to that perpetrated by Enron and Worldcom. While SOX increased the accuracy and validity of financial information for outside stakeholders, it created some challenges for businesses attempting to comply with SOX guidelines.

1. Internal Controls SOX compliance requires companies to implement several internal controls to safeguard the financial information of a company. Internal controls are specific to each accounting operation, such as accounts payable, cash reconciliations and fixed assets. Expanded internal controls add processing time to accounting functions, delaying the timeliness of financial information. Additionally, employees must ensure that all paperwork is accurate and approved by supervisors. Increasing the number and functions of internal controls slows the closing time for each accounting period and delays financial statement preparation.

2. Increased Personnel An important function of SOX guidelines is the segregation of accounting duties. This ensures that one individual does not handle certain accounting processes from start to finish, which may increase the chances of fraud or embezzlement. In order to meet the segregation of duties requirement, companies must add additional accounting personnel. Using current employees outside the accounting office is not acceptable because it breaks down the internal controls function. Additional Audits SOX guidelines require publicly held companies to have an annual audit conducted by a third-party accounting firm. The public accounting firm is limited in the total accounting services that it can perform. The separating of audit functions from consulting functions under SOX helps public auditors maintain an objective opinion about a company, but may require that more than one accounting firm be hired. Increasing the number of audits and accounting firms that must be used by a publicly held company increases business costs. Higher audit and accounting fees require companies to adjust their budgets to pay for these accounting services. More Regulations The SOX legislation was enacted in 2002, less than a year after the major accounting scandals of Enron and WorldCom. While the legislation provides some needed oversight in the accounting industry, it was not determined to be a final solution for the accounting industry. Future government regulations pose increased financial burdens on companies, increasing the costs of conducting businesses. Some regulations may also limit certain business operations.


Tougher Penalties Penalties for accounting fraud and embezzlement were increased under the new SOX guidelines. Unfortunately, some penalties enacted focused on minimal violations, such as not signing financial statements or issuing statements to the public stating that executive management has approved of any financial information released by the company. Strict penalties on such minor infractions may limit the executive talent pool if future management employees do not wish to be liable for such actions and penalties.

Major changes it wants to be implemented in the corporation

Sarbanes-Oxley is a new set of laws that dramatically changes the way that companies audit and report their financial data to the investment community and the Securities and Exchange Commission. There's some other stuff thrown in, but that's fundamentally what this is all about. SARBANES-OXLEY WILL MEAN BIG CHANGES FOR BOTH auditors and the companies they audit. The former now will be required to certify a companys internal controls and will no longer be able to use certain common audit strategies. Management faces the cost of implementing the new rules.

ACCORDING TO THE EXPOSURE DRAFT OF A NEW SAS , the understanding of internal controls required for CPAs to express an opinion on financial statements is not adequate for them to offer an opinion on the controls themselves. This means auditors will have to make changes to the audit process. THE AUDITOR MUST ATTEST TO MANAGEMENTS assessment of the effectiveness of an entitys internal controls using standards the Public Company Accounting Oversight Board issues or adopts. The auditor will require management to identify, document and evaluate significant internal controlsmanagement cannot delegate this function to the auditor. AUDITORS SHOULD ADVISE COMPANIES TO BEGIN the process of assessing the effectiveness of controls as early as possible. The task will be time-consuming, requiring management to determine which locations or business units to include in its evaluation. AUDITORS SHOULD NOT BE TOO CLOSELY INVOLVED with a companys assessment of its controls or they risk impairing their objectivity. The auditor cannot accept managements responsibility to reach conclusions on the effectiveness of the entitys controls nor can management base its assertion about the controls design and operating effectiveness on the results of the auditors tests. Congress has mandated numerous changes to financial reporting:

Real-time disclosures Officer certification


Increasing transparency Independence - now a law, not a virtue Mandated SEC review Final rules for pro forma statements due by January 26, 2003 New audit committee requirements - April 26, 2003 deadline Loans and certain trades prohibited - effective immediately

Impact of SOX on the corporate IT department The five areas and their impacts for the IT Department are as follows: Risk Assessment - Before the necessary controls are implemented, IT management must assess and understand the areas of risk affecting the completeness and validity of the financial reports. They must examine how the company's systems are being used and the current level and accuracy of existing documentation. Control Environment - environment factors include the integrity, ethical values and competence of the entity's people; management's philosophy and operating style; the way management assigns authority and responsibility, and organizes and develops its people; and the attention and direction provided by the board of directors. Control Activities - Control activities are the policies and procedures that help ensure management directives are carried out. They help ensure that necessary actions are taken to address risks to achievement of the entity's objectives. Control activities occur throughout the organization, at all levels and in all functions. They include a range of activities as diverse as approvals, authorizations, verifications, reconciliations, reviews of operating performance, security of assets and segregation of duties. In an IT environment, control activities typically include IT general controls -- such as controls over program changes, access to programs, computer operations -- and application controls.

Monitoring - Auditing processes and schedules should be developed to address the high-risk areas within the IT organization. IT personnel should perform frequent internal audits. In addition, personnel from outside the IT organization should perform audits on a schedule that is appropriate to the level of risk. Management should clearly understand and be held responsible for the outcome of these audits. Information and Communication - Without timely, accurate information, it will be difficult for IT management to proactively identify and address areas of risk. They will be unable to react to issues as they occur. IT management must demonstrate to company management an understanding of what needs to be done to comply with Sarbanes-Oxley and how to get there.


SOX in India Not everything that works in developed countries works in developing countries, but here is an example of the reverse while the SarbanesOxley (SOX) Act might not have had the expected impact in the U.S., similar reforms have had a positive impact in India, including on the share prices of Indian companies. These governance reforms could have net benefits in a poor-governance country, like India, but net costs for companies that are already well-governed, like the U.S. SUGGESTIONS It is suggested that in the light of the experience of the Act in the US, following reforms should be introduced in India for achieving corporate excellence and accountability:

1. Enactment of laws on the pattern of the Corporate and Criminal Accountability Act, 2002 and White Collar Crime Penalty Enhancement Act, 2002 for investigation and prosecution white collar corporate crimes. 2. The judiciary should play a proactive role for speedy trial of corporate frauds and award deterrent punishment to unscrupulous management found guilty of corporate offences. 3. The liability of directors under the Companies Act for their non-compliance of statutory provisions and fraudulent practices should be strict as that of an occupier under the Factories Act. The listing agreements with stock exchanges should also provide for strict penalty in case of misstatement or false information in quarterly reports. 4. The institutional investors should effectively discharge their responsibility in protecting the interests of small investors by bringing in class action. 5. The independent character and role of the Audit Committee under Companies Act and Listing Requirement need to be strengthened. The practice of the boards of family managed companies appointing their friends as non-executive directors should be stopped because the decision whether a director is independent or not is left to the Board of Directors. 6. Warning system like whistle blowing can be an effective anti-corruption tool. Indian Companies should encourage employees to directly inform top management about anything wrong observed by them in the company. On reported, a committee of officers and workers, including women representatives, should look into cases and grievances. 7. Strengthening the independence of auditors and segregation of audit and non-audit practices. Management of a company should be prohibited from influencing auditors


in discharge of their duties. At the same time, only those auditors having arms length relationship with the board of companies should be appointed as auditors and they should be prohibited from providing non-audit and tax audit services. 8. There should be greater self-discipline and emphasis on codes of ethics and social responsibilities on the part of companies. In the ultimate analysis the society has created business institution for its welfare and it has to discharge its duties and responsibilities as good corporate citizens.

The Act is becoming a global benchmark for internal best practices in corporate governance. It has prompted companies to take a fresh look at the system of disclosure, internal controls and accountability. Listed companies, including foreign issuers, now have much greater disclosure in financial reporting, audit committee independence and internal control. There is general consensus that the Act has strengthened good practices in corporate governance. At the same time, the interpreting and enforcing agencies of the Act have become strict in their functions.

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