ABUSE OF POWERS BY DIRECTORS AND ROLE OF AUDITORS - CORPORATE GOVERNANANCE PRESENTATION

COMPANY LAW / CORPORATE GOVERNANCE -ABUSE OF POWERS BY DIRECTORS AND ROLE OF AUDITORS

1. Abuse of Powers by Directors & Role of Auditors Presented By, Mariya P S , BBA.LLB -21

2. "An audit is not just about numbers; it’s about trust, transparency, and responsibility." – Sir David Tweedie (Former Chairman, IASB) "Corporate leadership is not about privilege; it’s about responsibility. When directors forget this, companies collapse, and stakeholders suffer." – Warren Buffett

3. Introduction Directors are responsible for managing a company and making decisions in the best interest of shareholders. Sometimes, directors misuse their power for personal gain or in a way that harms the company. Such misconduct can lead to financial losses, reputational damage, and legal consequences. Laws exist to prevent such abuse and protect shareholders, employees, and the company’s financial health.

4. PROVISIONS – Companies Act,2013 Section 166: Directors must act honestly, with care, and in the company’s best interest. They should avoid conflicts of interest and not misuse their position. Section 447: If a director commits fraud, they can be jailed for up to 10 years and fined, making it one of the strictest provisions under Indian corporate law. Section 149(12): Independent directors are held responsible for acts of wrongdoing only if they were directly involved or failed to exercise due diligence. Sections 241-242: If a director engages in unfair or prejudicial conduct against shareholders, the National Company Law Tribunal (NCLT) has the power to intervene and take necessary actions, including removing the director.

5. SEBI Rules LODR (Listing Obligations and Disclosure Requirements) Rules (2015): Listed companies must follow strict governance standards to ensure transparency and prevent misuse of power by directors. Insider Trading Regulations (2015): Directors cannot use confidential company information for personal financial gain. Violators face severe penalties, including monetary fines and debarment from holding directorial positions.

6. Case Laws Foss v. Harbottle (1843): Established the principle that shareholders must act collectively if they want to sue directors, ensuring company interests are protected through internal governance mechanisms first. Shailesh Prakash v. Union of India (2003): Reinforced the fiduciary duty of directors and their responsibility to act in good faith and with due diligence.

7. How Directors Misuse Power? Fraud (Section 447, Companies Act) Example: Satyam Scam (2009) – Satyam’s directors manipulated financial statements to inflate profits, misleading investors and stakeholders. Insider Trading (SEBI Rules) Example: Rajat Gupta Case – A Goldman Sachs director leaked confidential investment information to benefit from stock market gains. Oppressing Small Shareholders (Sections 241-242, Companies Act) Example: Tata Sons v. Cyrus Mistry (2019) – Allegations of unfair removal of a director and corporate misgovernance . Conflict of Interest (Section 166(4)) Example: Directors engaging in transactions that benefit themselves personally rather than the company. Poor Financial Management & Misgovernance Example: IL&FS Crisis (2018) – Corporate mismanagement led to hiding massive debts, triggering a financial collapse.

8. What Happens If a Director Misuses Power? Companies Act, 2013: Section 166(5): Directors can be held personally liable for misconduct. Section 447: Engaging in fraudulent activities can result in imprisonment of up to 10 years. SEBI Regulations: Insider trading penalties can go up to Rs. 25 crore or three times the profit made , whichever is higher. Regulatory Actions: The SEBI, NCLT, and Serious Fraud Investigation Office (SFIO) conduct investigations, impose penalties, and, in extreme cases, debar directors from holding any future positions.

9. How to Stop Directors from Misusing Power ? Independent Directors (Section 149): Independent directors play a key role in monitoring management and ensuring transparency in decision-making. Audit Committees (Section 177): These committees review financial statements and company policies to detect fraud or mismanagement early. Whistleblower Protection Mechanisms: Encouraging employees and stakeholders to report suspicious activities without fear of retaliation. Regulatory Oversight: SEBI, NCLT, and SFIO actively monitor corporate activities and intervene when necessary.

10. What needs to be improved? Stronger Enforcement: Many cases of director misconduct take years to resolve; faster legal action is needed. Better Whistleblower Protections: Many employees hesitate to report wrongdoing due to fear of retaliation. More Independent Oversight: Boards should include more independent directors to prevent conflicts of interest. International Best Practices: Learning from global governance models like the UK’s Corporate Governance Code and the US Sarbanes-Oxley Act can strengthen corporate governance in India.

11. ROLE OF AUDITORS

12. Auditors play a critical role in financial accountability, fraud detection, and legal compliance as mandated under the Companies Act, 2013 and SEBI Regulations . Section 134, Companies Act, 2013 : The Board of Directors is responsible for financial reporting, but auditors verify its accuracy.

13. Corporate Governance & Auditors Corporate governance is the framework of rules and practices ensuring a company is run ethically. Key elements include: Board of Directors – Strategic decision-makers Shareholders – Owners with voting rights Regulators (SEBI, NFRA, RBI) – Monitoring compliance Auditors – Independent watchdogs ensuring transparency 🔍 Under SEBI (LODR) Regulations, 2015 , listed companies must have independent audits to protect investors.

14. Who’re Auditors? Auditors are professionals responsible for reviewing a company's financial statements and internal controls. Types of Auditors: Internal Auditors – Evaluate risk management ( Sec. 138, Companies Act, 2013 ) External Auditors – Statutory audits ( Sec. 139, Companies Act, 2013 ) Forensic Auditors – Investigate financial fraud Government Auditors – Audit public sector organizations 📌 Section 144, Companies Act, 2013 : Auditors are prohibited from providing non-audit services like bookkeeping to avoid conflicts of interest.

15. Responsibilities of Auditors in Corporate Governance Ensuring Financial Transparency – Reviewing financial statements for accuracy ( Section 143(2), Companies Act, 2013 ). Detecting & Preventing Fraud – Identifying financial misrepresentation ( Section 143(12), Companies Act, 2013 ). Ensuring Legal Compliance – Adhering to financial & governance laws ( SEBI LODR Regulations ). Strengthening Internal Controls – Assessing a company’s risk management. Providing Independent Audit Reports – Objective financial reporting

16. Legal Provisions Companies Act, 2013: Section 139 – Appointment of auditors Section 143 – Powers & duties of auditors, fraud reporting Section 147 – Penalties for misconduct SEBI LODR Regulations, 2015: Requires companies to maintain accurate financial disclosures. Mandates rotation of auditors every five years ( Section 139(2), Companies Act, 2013 ). NFRA (National Financial Reporting Authority) – Section 132, Companies Act, 2013 : Regulates & disciplines auditors of large entities.

17. How Auditors Strengthen Corporate Governance? Enhancing Transparency : Ensuring financial statements reflect the company’s true financial position . Strengthening Accountability : Management is held accountable for misstatements. Preventing Corporate Frauds : Detecting financial manipulation & fraud. 🔍 Section 143(12), Companies Act, 2013 : If auditors detect fraud exceeding ₹1 crore, they must report it to the government. 📌 SEBI (Prohibition of Insider Trading) Regulations, 2015 : Auditors play a role in whistleblowing financial fraud cases.

18. CASE STUDIES 📌 Satyam Scam (2009) 🔹 Auditors Involved: PwC 🔹 Issue: ₹7,000 crore financial fraud due to falsified bank statements. 🔹 Legal Impact: Led to stricter SEBI regulations & the establishment of NFRA. 📌 Enron Scandal (2001) 🔹 Auditors Involved: Arthur Andersen 🔹 Issue: Misstated profits and concealed debt. 🔹 Legal Impact: Led to the Sarbanes-Oxley Act, 2002 (USA) for stricter auditing standards. 📌 Post-Scandal Reforms : NFRA Rules, 2018 – Enhanced regulatory oversight of auditors.

19. Challenges Faced by Auditors Management Pressure : Companies may try to influence audit outcomes. Lack of Auditor Independence : Close relationships with clients can lead to biased reports. Complex Regulatory Requirements : Constantly changing compliance standards. Sophisticated Financial Frauds : Digital frauds & AI-driven scams. 📌 Section 144, Companies Act, 2013 restricts auditors from offering non-audit services to prevent conflicts of interest.

20. Strengthening the Role of Auditors Stricter Regulatory Oversight – SEBI & NFRA actively monitoring audit firms. ✅ Mandatory Auditor Rotation – Companies must change auditors every 5 years to maintain independence ( Section 139(2), Companies Act, 2013 ). ✅ Technology Adoption – Use of AI & blockchain for fraud detection. ✅ Whistleblower Protection – SEBI encourages reporting financial misconduct. 📌 SEBI (LODR) Regulations, 2015 : Requires auditors to certify compliance with governance norms before companies file financial reports.

21. Global Best Practices in Auditing & Corporate Governance UK Corporate Governance Code – Encourages auditor independence & financial integrity. Sarbanes-Oxley Act (2002, USA) – Introduced mandatory internal controls & strict penalties for audit failures. EU Audit Reform (2016) – Requires mandatory rotation of auditors every 10 years . 🔍 What India Can Learn? Stricter enforcement of SEBI & NFRA guidelines. Mandatory audit firm rotation beyond current limits.

22. Conclusion - Abuse of Powers by Directors & Role of Auditors in Corporate Governance ✅ Directors & Auditors – Two Pillars of Corporate Governance Directors hold fiduciary responsibilities but may misuse power for personal gain. Auditors act as independent watchdogs, ensuring compliance & financial integrity. ✅ Key Takeaways: Abuse of Power by Directors leads to financial fraud, mismanagement & shareholder losses. Auditors play a critical role in preventing & detecting such abuses. Companies Act, 2013, SEBI (LODR) Regulations & NFRA Rules provide a legal framework for accountability. ✅ Need for Stronger Governance & Regulatory Reforms Stricter penalties for directors violating fiduciary duties. Enhanced auditor independence to prevent conflicts of interest. Technology-driven auditing (AI & Blockchain) for fraud detection.

23. "Governance fails when power is unchecked and oversight is compromised. Ethical directors and independent auditors are the guardians of corporate trust.”

24. THANK YOU