Transparency: critical role of digital signature
|
The regulator can make it mandatory for corporates
|
When the company physically held itself most of the assets owned by it, the management and auditors played a key role in actually verifying them and reporting them to the shareholders.
As the Satyam fraud unfolds with all its ramifications, a simple question keeps popping up in discussions among even laypersons. How could someone show in the books a non-existent bank deposit? The audacity apart, it requires co-operative minds to do so. More often than not when a bank balance is ascertained, the number that gets into it is the one stated by the management and certified by the auditor. They together can decide to be less than truthful. In the case of Satyam, this is what appears to have happened.
A business is constantly in the process of creating assets, converting them into one form to the other, expending them, creating liabilities and extinguishing those liabilities. The balance-sheet is a snapshot of this ongoing activity on a given date. On the date of the balance-sheet, the business could be owing money to others. Or, it could itself being owed money by others. The surplus money, if any, should remain as some form of asset or be represented as a loss up to that date.
Except fixed assets, companies hold very little in the form of assets with themselves. Practically, someone else holds everything else in custody and is represented as a debt owed to the company. Thus, cash in the bank is not really held with the company. It is in the form of debt owed by the bank. Similarly, the securities and other investments owned by the company are actually represented by debt owed by a depository, a mutual fund or other institution. Even the liabilities to shareholders are represented by entries in the depositories and stock exchanges to a large extent.
Role of auditors
When the company physically held itself most of the assets owned by it, the management and auditors played a key role in actually verifying them and reporting them to the shareholders. Since the role has evolved into certifying the account entries and verifying statements from the debtors, it could provide ammunition for temptation.
“This is not a unique problem, but one that arose in several other situations and was satisfactorily solved in many of those cases,” says B. Robert Raja, a former I-T (income-tax) sleuth, who formed part of the team that cracked the securities scam of the early 90’s. “It usually pays to remove the source of temptation to violate than provide punitive measures. Traffic authorities know it all the time. It is much easier to enforce lane discipline by constructing a median wall rather than penalising drivers for crossing the yellow line,” says Mr. Raja.
In this context, he cites income-tax deduction at source (TDS). Until recently, one who deducted the tax paid the money into the Government account and then certified such payment by way of a TDS certificate.
This certificate was then issued to the person on whose behalf the tax was deducted, who, in turn, furnished this as proof of tax payment along with his I-T return. The I-T Department has since plugged the hole by relying on the receipt side accounting rather than the deduction certificate.
“Now it is recognised as a tax payment only if the money had come into the Government coffers. The Government gets its assurance from the bank (and National Securities Depository Ltd. (NSDL), which does the book-keeping for this) that actually received the money from the one who deducts tax at source. The one who deducts the tax or the eventual taxpayer has no means of manipulating the amounts,” points out Mr. Raja, who is also an information security expert.
He also cities stock ownership and stock trading. When the settlement was through physical delivery and where the settlement cycles were long, there were possibilities for non-deliveries and mischief. “The dematerialisation of stock certificates and shortening of the cycles have reduced the opportunity for the mischief to a significant extent. From an information perspective, in the earlier model, the information flow was so slow and the parties had a longer time to make good any untruth they may have uttered. This automatically led to a licentious atmosphere,” he points out.
Verification
NSDL has started intimating its actual holdings to the holders of depository accounts and is also offering them a facility to verify their balances directly from the depository. “This is actually the defined role of the depository participants — but when they do not add value to the information they receive from the depository and pass it on to the clients, a direct intimation from the depository substantially reduces the opportunity for mischief by a participant,” Mr. Raja points out.
The current system of audit and publication of corporate accounts require a similar solution. “While there are aspects of accounting where the management and the auditors do have a role to play, they are merely restating or attesting numbers when it comes to many of the assets and liabilities. In these cases, they are unnecessary and temptation-prone middlemen,” he argues.
Along with their accounts, companies could also be asked to publish direct statements from the creditors and debtors. Perhaps, a threshold on value or type of account may be placed on that. But how do companies manage the logistics of accurately reproducing and distributing the statements from multiple parties? And how can one ensure that the management does not manipulate it? The country already has a legislatively sanctioned digital signature infrastructure, says Mr. Raja. “It would be a simple matter for the companies to obtain a digitally signed balance confirmation as on the last date of the year and publish the document as an annexure to their annual accounts. The same digitally signed statements can also be submitted to the exchanges and other regulators. The statements can be simple PDF documents with the digital signature of the party and this would ensure easy verification by any shareholder or investor. This will also discharge a rather onerous burden of the auditors as at present and bring in a lot more transparency into the system,” Mr. Raja points out.
Mindset change
Well, this could actually bring down the cost of compliance to companies. Auditors can now focus on items that call for their professional expertise rather than act as a mere attesting agency with the attendant risks. Investors, too, can feel happy that they are getting the most accurate information directly from its source.
The Securities and Exchange Board of India (SEBI) could step in here too as it had done recently in the case of pledging of shares by the promoters. The regulator could make it mandatory under the listing agreement for corporates to file digitally signed certification of balance deposits from banks.
A similar requirement could be made in the case of other assets too. More than the regulation, a mindset change is all that required to implement this. Well, this mindset change is inevitable as is important in the light of what had happened in Satyam.
K. T. JAGANNATHAN
Printer friendly
page
Send this article to Friends by
E-Mail
Business
