A map for IDs’ to build an effective FRM and key challenges ahead: Our perspective

Corporate fraud and misconduct: Role of independent directors

Corporate governance norms have been strengthened by the Companies Act, 2013, and the regulations of the Securities Exchange Board of India (SEBI) for listed companies’, where key emphasis is given to frauds by recognising them as a key risk and placing the accountability on the board and senior management. In the case of listed entities, there is an additional responsibility/oversight exercised by “Audit Committee” including IDs on fraud risk management.

Key fraud related regulatory obligations of IDs

Some key fiduciary responsibilities of IDs include:

  • Obtain comfort on the integrity of financial information, financial controls
  • Ensuring that fraud risk management systems are robust
  • Ensuring that related party transactions are justified and are in the company’s interest
  • Seeking appropriate clarification or amplification of information
  • Reporting concerns about unethical behaviour, actual or suspected fraud or violation of the company’s code of conduct or ethics policy
  • Ascertaining and ensuring that the company has an adequate and functional vigil mechanism
  • Being cognizant of not disclosing confidential information such as unpublished price-sensitive information and commercial secrets
  • Assessing the quality, quantity, and timeliness of the flow of information between the listed entity’s management and the board of directors.

In our view, as the fraud risk landscape evolves, there is a need for IDs to closely and continuously monitor the risks emanating from the changing business environment and periodically drive the agenda on the board to revisit the existing fraud risk management framework.

While the ID community is well versed with their obligations to fulfil their fiduciary responsibilities, at times, the ability of IDs to deliver on these expectations are hampered by limitations or challenges, some of which are highlighted below:

  • Due to absence of adequate training and guidance, IDs at times may lack in-depth knowledge of effective FRM programmes
  • In certain cases, limited/ infrequent discussions in the board/audit committee meetings about fraud risks that organisations face and improvement requirements of the FRM framework.
  • At times, lack of timely access to critical information might affect the ID’s capability to effectively perform their tasks. In addition, distortion of facts with the volume and complexity of the data involved could also provide additional challenges for IDs to analyze and take the right decisions.
  • In some cases, limited involvement could impact the ability of IDs to delve deeper into governance and other matters.
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