A New C-Suite to Draw Up a Compliance Road Map
With Indian regulations rising severalfold in volume and complexity, more companies are creating dedicated teams to study and adapt to the changes and manage risks
Mumbai: As the Indian regulatory environment gets stricter by the day, companies are scrambling to set up a core group or a task force of senior executives from across functions to help understand the impact on business as well as identify and mitigate risks.
These core teams consist of four to six senior executives and experts from across functions such as tax, technology, compliance, legal, supply, marketing or sales and audit. Companies like Tata Motors, HDFC Bank and Godrej Group, among others, have already put in place such cross-functional core teams of top executives for a seamless transition, said industry insiders. In most cases, the core group reports to the audit committees in the companies. “Compliance is becoming more and more an important driver of business prompting companies to create cross-functional teams to understand the impact of regulatory changes on businesses, to look at the business model and take proactive steps to manage risks,” said Jignesh Thakkar, partner advisory services, EY. Their main task is to relook at old business strategies to transform to next level of strategies, said Thakkar.
One of their major functions is also to mitigate and manage future risks. “There are a lot of cross functional impacts and risk management that a company has to do,” said a person close to the development. “Like the impact of choosing a new auditor for some of the ongoing projects,” he said. As per the rule, auditors are not allowed to help the company with any advisory work. So if a company is already advising a firm, it cannot be hired as an auditor.
According to the EY database in 2016, more than 25,000 different notifications and circulars were issued by government authorities, an increase of three times in the last three years. Companies need a dedicated team to go through the changes and see what they need to do.
About 50-60% time of all support functions like tax, regulations and compliance is going in identifying and analysing change in requirement and updating the management
is on the rise with new rules and frameworks such as GST, GAAR, PoEM, BEPS, audit rotation, Ind-AS, ICDS, new capital gains guidelines in the Budget and internal financial controls
putting in place core teams comprising lawyers, tax experts, auditing experts, marketing and technology experts say industry experts.
As companies and banks face a maximum number of regulatory changes they have to comply within a year ever, from GAAR (General AntiAvoidance Rule) to GST (Goods and Services Tax) and audit rotation to Ind-AS (Indian Accounting Standards), this core team can help companies pre-empt and analyse how one change may have an impact on the other and overall company strategy.
For instance, a change in the accounting standards could mean the company may have to relook at its mergers and acquisitions (M&A) strategy. Or selecting a new auditor could mean putting a turnaround project in a subsidiary at risk. These core teams have to make sure that while complying with one regulation the company shouldn’t be caught on the wrong foot under another regulation.
With the statutory regulations changing every day, the Godrej Group started a system of a portalbased compliance tool which tracks more than 400 laws of the land to ensure compliance with each one of them. “It is a team effort and having a formalised system helps us track level of compliance and criticality,” said V Swaminathan, head – corporate audit and assurance at Godrej Industries. “At the company risk assessment level, we have a risk com- mittee chaired by an independent director where the business head is the key person along with his teams,” he said. Compliance per se is one of the topmost risks for companies today, he said. Tata Motors and HDFC Bank did not respond to ET’s queries.
Indian companies are set to see a number of regulatory changes including those on tax and auditing that could entirely change the way business is done. In next two years, Indian companies will see a slew of regulatory changes including GST, GAAR, PoEM (Place of Effective Management), BEPS (Base Erosion and Profit Shifting), ICDS (Income Computation and Disclosure Standards) audit rotation and new accounting standards to name a few.
“Adoption of a new accounting standard may require a company to revisit the commercial terms in an M&A transaction or the move to the GST framework may require companies to rework their supply chain worried that while complying with one regulation they shouldn’t be caught on the wrong foot under another regulation strategies and the IT and accounting systems,” said said Sai V, partner, KPMG. “Every one of these regulatory-driven changes could have an impact on a seemingly unrelated area in another part of the organisation, and no one person may have full visibility on all such potential issues, and this is where the role of a cross-functional working group / steering committee becomes very relevant in managing these changes,” he explained.
“One vital reason for the need of a strong compliance function now is to avoid big-ticket non-compliance legal issues,” said Karl Fernandes, vice president, head of in-house practice group / general counsel search practice at legal and governance recruitment specialists Vahura.
Referring to the increase in cost burden on companies to comply with the regulations due the new Companies Act and Sebi, Arun Duggal, chairman, ICRA, and a member on several Indian boards, said, “Companies have to now devote a lot of resources on internal teams and engage external consultants that take away from the core business of the company. It is right for government and industry to conduct detailed review of cost benefit of additional regulatory burden and identify which regulations are serving useful purpose and which are not.”
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