“Strong focus on corporate governance a must”

In Conversation with Deepak Satwalekar

Deepak Satwalekar Deepak Satwalekar retired as the Managing Director and Chief Executive Officer (MD & CEO)   of HDFC Standard Life Insurance Company Ltd. Prior to that,he was the Managing Director of HDFC,the country’s    largest mortgage lender. In addition, Mr.Satwalekar has been a consultant to the World Bank,the Asian  Development Bank and other bilateral and multilateral agencies and has worked in several countries. He also serves as an independent director on the boards of some large companies in India. In a recent interaction with Neville Dumasia, Partner and National Leader, Risk Advisory Services for EY, Mr. Satwalekar shares his perspective on a broad range of issues impacting today’s boards. 

Neville Dumasia (ND): What are the most critical challenges facing audit committee members today and what do you see as the most effective approach to addressing these?

Deepak Satwalekar (DS): External risks faced by companies and the economy are definitely the most significant challenges from a company’s perspective today. The global crisis continues to be a worry and India definitely has been exposed to it in some form or the other. I do not see many companies addressing these risks as effectively.

The two major risks or concern areas for Indian companies continue to be their exposure to the fluctuations in the
commodity prices and the forex volatility. Another key challenge is the effect of the Companies Act specifically on related-party transactions. This has cast a significant responsibility on the audit committees everywhere. I believe this is not the case with family owned businesses, but also businesses that are construed to be professionally managed and independently held but engage in transactions within group companies. This is most specifically the case in the financial sector where companies have subsidiaries and affiliates. How one deals with each other in this context is going to be extremely important. Considerations such as at what level do we do a pre-assessment or a pre-approval of a transaction or at what level do we need to worry about arm’s length, are going to be uppermost in the mind. This along with other aspects of the Companies Act 2013 will place an enormous work load on both, companies and independent directors.

ND: What are the key aspects crucial for determining the long-term effectiveness of an audit committee member?

DS: I believe the ability to challenge the management on key aspects, without being extremely investigative, willingness to put in long hours and of course a continuous focus on learning new aspects, as the environment evolves, are crucial to long- term effectiveness of any audit committee member. I believe the willingness to be able to learn new aspects is especially critical as we live in an age where there are new guidelines being issued almost monthly, almost all of which have serious implications and which cast onerous responsibilities on the constituents. For instance, today there are some companies that have become the early adopters of IFRS and one doesn’t know what form or shape that might take in India. I think it will definitely be challenging to be able to juggle all these aspects.

ND: What is an ideal or good timeframe for an audit committee member to continue to be in that role?

DS: If we were to assess this question, it is like one was prescribing a time for an independent director till they become non-independent. Some can be non-independent from day one while some will be independent all along. It all depends on the mindset of a particular director. One thing I can say with certainty is that companies are becoming complex, especially those that span across multiple products, locations and have multiple divisions. It does take a couple of years to really understand a company’s diverse aspects including the contours of its business model. So I will not say that one should effect a change in audit committee membership every three years.

ND: How do you view the role of audit committees vis- a-vis internal and external auditors? What are the key aspects that determine these relationships?

DS: I believe it is essential for audit committees to engage closely with internal and statutory auditors definitely at least once every quarter or as the need arises. The relationship between the audit committee and the auditors (both internal and external) is one of a clear understanding of expectations, candour and comfort to be able to have a serious debate on issues. We would also definitely like the auditors to forewarn us to the extent possible so that we have sufficient time to think through, engage with management and provide solutions which are optimal. From this perspective, a deeper engagement with the internal and statutory auditors is definitely important.

ND: How can the audit committee and the board ensure they are up to speed with what’s happening, both from a business and a regulatory perspective?

DS: When I was on the board of a particular company, one of the things our statutory audit firm used to schedule our meeting was a session, focussing on the regulatory changes that have taken place in the past few months, both from a domestic and an international perspective, while also elaborating on the implications of those for us. This update was definitely very useful. It would be rare for a director to say they are up to speed on aspects and do not need to go through these sessions. If you want to seek such information and updates, there are very few audit firms who will not be keen on sharing such updates with you.

Apart from that, in another corporate entity that I am associated with, the Chief Compliance Officer took us through what the implications of the changes in the Companies Act were going to be – for the company, the board and the audit committee. Apart from that, I do get updates from different firms about all these changes. Whether I read through these or not, the fact remains I have access to the information. It has become critical for an audit committee member to keep up to speed because the responsibilities are pretty stiff. If you saw what happened after the Satyam episode, it did serve as a wakeup call to corporate India and the directors.

ND: How do you ensure you get the best from an internal auditor? Are you in agreement with how they generally function?

DS: My views are very biased on this aspect. I would not be on the board of a company where there was not a strong focus on corporate governance and a strong practice in the audit function, whether internal or statutory. It is important that you are able to clearly define your expectations to internal auditors and guide them on your requirements.

It was different gauging the internal audit function five years ago, but it has considerably changed since then. There has been a lot of change whether it is the external or the internal environment within the company, the people in some instances, and also our expectations from what we want from the internal auditors. There are a lot of aspects to consider beyond just compliance and assurance, as just being compliant is not the end of the game. One needs to move beyond compliance, onwards to processes and then onto policy evaluations. Do the policies really translate the strategies into the result you want? The people aspect is also important, with directors being prompted to assess the calibre of people they want for internal audit function, with all these changes.

ND: How do you best deal with commentary from the external or for that matter an internal auditor that may not be entirely a pleasant one?

DS: There are no two ways of looking at it. If they do not provide me news or information about something that is not right when also things are not right, the chances of their being auditors next time around would be pretty bleak. If they do not do their job, continuance in that role becomes untenable.

The way I look at it, I would like to sleep easy at night, it is for these guys to be awake worrying about the company and ensuring things are right, which is even more pronounced in the case of companies listed in the US, with regard to compliance with SOX 404. Some people across some organizations talk about the additional work it has created but three to four years after SOX came into place, audit committees have admitted to the fact that it is one of the better things to have happened. So the question is not that we really need to have SOX 404 in India or that we need to wait for it while a company lists in the US, what is important is that adoption of best practices is not an issue, it can be adopted anytime.

ND: What are your views about the fraud aspect, from an audit committee perspective?

DS: One has to be extremely vigilant. If one believes something is not right, one has to highlight it and also consider what are the checks and balances you have, while also be able to stand up to the scrutiny of audit committees. You cannot guarantee any results in terms of fraud prevention but what is crucially important is the effort one puts behind it.

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