The Narayana Murthy Committee report on corporate governance has made a number of recommendations in its draft report to Securities and Exchange Board of India.

The committee met thrice on December 7, 2002, January 7, 2003 and February 2003, to deliberate the issues related to corporate governance and finalise its recommendations to Sebi.

The committee has recommended that the audit committees of publicly listed companies should be required to review the following information mandatorily - financial statements, management discussion and analysis of financial condition and results of operations, reports relating to compliance with laws and risk management among others.

The committee has also said that all audit committee members should be "financially literate" and at least one member should have accounting or related financial management expertise.

In case a company has followed a treatment different from that prescribed in an accounting standard, management should justify why they believe such alternative treatment is more representative of the underlying business transaction. management should also clearly explain the alternative accounting treatment in the footnotes to the financial statements.

The auditor may draw reference to this footnote without necessarily making it the subject matter of an audit qualification. Companies should be encouraged to move towards a regime of unqualified financial statements. This recommendation should be reviewed at an appropriate juncture to determine whether the financial reporting climate is conducive towards a system of filing unqualified financial statements.

A statement of all transactions with related parties including their bases should be placed before the independent audit committee at each board meeting for formal approval.

This statement should include transactions of a non arm's-length nature also. Management should be required to explain to the audit committee the reasons for the non-arm's length nature of the transaction.

The committee believes that it is important for corporate boards to be fully aware of the risks facing the business and that it is important for shareholders to know about the process by which companies manage their business risks. In light of this, it was suggested that procedures should be in place to inform board members about the risk assessment and minimisation procedures.

These procedures should be periodically reviewed to ensure that executive management controls risk through means of a properly defined framework.

It was also suggested that management should place a report before the board every quarter documenting any limitations to the risk taking capacity of the corporation. This document should be formally approved by the board.

Procedures should be in place to inform board members about the risk assessment and minimisation procedures. These procedures should be periodically reviewed to ensure that executive management controls risk through means of a properly defined framework.

Management should place a report before the entire board of directors every quarter documenting the business risks faced by the company, measures to address and minimise such risks and any limitations to the risk taking capacity of the corporation. This document should be formally approved by the board.

Companies should be encouraged to train their board members in the business model of the company as well as the risk profile of the business parameters of the company.

Companies raising money through an IPO should disclose the uses and application of funds by major category on a quarterly basis as part of their quarterly declaration of unaudited financial results. This disclosure should distinguish between specified and unspecified uses of IPO proceeds and should be approved by the audit committee.

On an annual basis, the company shall prepare a statement of funds utilised for purposes other than those stated in the offer document/prospectus.

This statement should be certified by the independent auditors of the company and formally approved by the audit committee.

The terms of reference of the committee are to review the performance of corporate governance and To determine the role of companies in responding to rumour and other price sensitive information circulating in the market, to enhance the transparency and integrity of the market.

Points to ponder

• All audit committee members should be "financially literate" and at least one member should have accounting or related financial management expertise.
• It is important for corporate boards to be fully aware of the risks facing the business and that it is important for shareholders to know about the process by which companies manage their business risks.
• Companies should train their board members in the business model of the company as well as the risk profile of the business parameters of the company.