CORPORATE REPORTING AND DISCLOSURE PRACTICES – ROLE OF INDEPENDENT DIRECTORS

1. CORPORATE REPORTING AND DISCLOSURE PRACTICES – ROLE OF INDEPENDENT DIRECTORS Presentation by P.R. Ramesh August 6, 2006 ICAI NIRC New Delhi ICAI NIRC TRAINING PROGRAMME FOR INDEPENDENT DIRECTORS, August 6 2006

2. CONTENTS THE REPORTING LANDSCAPE OBJECTIVES OF FINANCIAL REPORTING TYPES & ISSUES IN REPORTING AND DISCLOSURE TOWARDS TRANSPARENCY IN REPORTING AND DISCLOSURE ROLE OF DIRECTORS IN RELATION TO CORPORATE REPORTING AND DISCLOSURE ICAI NIRC TRAINING PROGRAMME FOR INDEPENDENT DIRECTORS, August 6 2006

3. The Reporting Landscape • Global Markets – the Services Revolution • Accountability • Cross border Capital flows • Basis for business decisions • Corporate Reporting Failures • Corporate Governance • Regulatory Framework • Changes in Technology and Products ICAI NIRC TRAINING PROGRAMME FOR INDEPENDENT DIRECTORS, August 6 2006

4. Accountability • A business enterprise receives capital from outside investors, lenders, and other creditors. • It is accountable to them – it has an obligation to keep them informed about performance, conditions, and prospects. • Also accountable to others who provide resources or environment in which to operate: Employees, government, community at large. ICAI NIRC TRAINING PROGRAMME FOR INDEPENDENT DIRECTORS, August 6 2006

5. Cross border Capital flows • On many stock exchanges foreign listings are a large % of total. USA December 2003: • NASDAQ: 10% (338 cos., 37 countries). • NYSE: 20% (467 companies, 50 countries). • Foreign is 33% of market value. • US SEC total: • 1981: 173 foreign companies listed in US. • 1991: 439 foreign companies listed in US. • 2002: 1,400 foreign out of 16,000 total. ICAI NIRC TRAINING PROGRAMME FOR INDEPENDENT DIRECTORS, August 6 2006

6. Basis for business decisions • Capital Market transactions • Mergers & Acquisitions • Employee Stock Options • Borrowing and Lending ICAI NIRC TRAINING PROGRAMME FOR INDEPENDENT DIRECTORS, August 6 2006

7. Company failure – director failure !! January 31, 2002 October 16, 2001 March 28, 2002 June 20, 2002 Issue: Off-Balance Sheet Accounting and Financial Reporting Fraud Impact: $3 billion in undisclosed losses Issue: Financial Reporting Fraud through improper revenue recognition Impact: $12.4 billion in overstated earnings Issue: Financial Reporting Fraud and embezzlement Impact: $2.5 billion of hidden debt Issue: Financial Reporting Fraud Impact: $9 billion in unreported expenses ICAI NIRC TRAINING PROGRAMME FOR INDEPENDENT DIRECTORS, August 6 2006

8. Corporate Governance Pillars Primary characteristics to be embedded • Discipline – universally accepted behaviour • Transparency – candid, accurate, timely information • Independence – no board/committee conflicts (of interest) • Accountability – by law/statute to company • Responsibility – to relevant stakeholders • Fairness – current & future interests/minorities • Social responsibility – not discriminatory or exploitive environmentally and personally ICAI NIRC TRAINING PROGRAMME FOR INDEPENDENT DIRECTORS, August 6 2006

9. Regulatory Framework • Sarbanes Oxley • Reporting in the financial services sector • Quotas, obligations, etc. • Taxation • Eligibility for business transactions ICAI NIRC TRAINING PROGRAMME FOR INDEPENDENT DIRECTORS, August 6 2006

10. Changes in Technology and Products • Intangible Assets – Licences, Rights, etc • Tangible Assets – component accounting • Barter transactions • Options and Swaps • Futures • Complex arrangements – BOOT, BOT, BOMT, Service concession agreements, etc ICAI NIRC TRAINING PROGRAMME FOR INDEPENDENT DIRECTORS, August 6 2006

11. CONTENTS THE REPORTING LANDSCAPE OBJECTIVES OF FINANCIAL REPORTING TYPES & ISSUES IN REPORTING AND DISCLOSURE TOWARDS TRANSPARENCY IN REPORTING AND DISCLOSURE ROLE OF DIRECTORS IN RELATION TO CORPORATE REPORTING AND DISCLOSURE ICAI NIRC TRAINING PROGRAMME FOR INDEPENDENT DIRECTORS, August 6 2006

12. Financial Statements - Objectives • Provide information that is useful in making business and economic decisions to users • internal users: detailed informationexternal users: summary information • provide information which will aid in predicting future cash flows • provide information relative to an enterprise’s economic resources, the claims to those resources (obligations) and effects ICAI NIRC TRAINING PROGRAMME FOR INDEPENDENT DIRECTORS, August 6 2006

13. Conceptual Framework REPORTING ACCOUNTING ELEMENTS FINANCIAL STATEMENTS OBJECTIVES RECOGNITION EARNINGS MEASUREMENT FUNDS FLOWS QUALITATIVE CHARACTERISTICS ICAI NIRC TRAINING PROGRAMME FOR INDEPENDENT DIRECTORS, August 6 2006

14. Financial Statements – Qualititative Characteristics • Relevance • Reliability • Comparability (including consistency) Quality in a product or service is not what the supplier puts in. It is what the customer gets out and is willing to pay for. A product is not quality because it is hard to make and costs lot of money, as manufacturers typically believe. This is incompetence. Customers pay only for what is of use to them and gives them value. Nothing else constitute quality – Peter Drucker ICAI NIRC TRAINING PROGRAMME FOR INDEPENDENT DIRECTORS, August 6 2006

15. Relevance • IASB : Information is “relevant” when it influences the economic decisions of users by helping them evaluate past, present or future events or confirming, or correcting their past evaluations • FASB: …..accounting information must be capable of making a difference in a decision by helping users to form predictions about the outcomes of past, present, and future events or to confirm or correct expectations Definitions differ in whether information mustactually make a differencein a decision or becapable of making a difference in a decision ICAI NIRC TRAINING PROGRAMME FOR INDEPENDENT DIRECTORS, August 6 2006

16. Relevance • Predictive value • Confirmatory value • Timeliness ICAI NIRC TRAINING PROGRAMME FOR INDEPENDENT DIRECTORS, August 6 2006

17. Financial Statements - Reliability • Representational faithfulness - must potray the important financial relationships of the enterprise • Verifiability - several independent measures will obtain the same accounting measure • Neutrality - accounting information should serve to communicate without attempting to influence behaviour • Prudence or conservatism? Conservatism introduces a bias into financial reporting and tends to conflict with significant qualitative characteristics, such as representational faithfulness, neutrality, and comparability (including consistency) ICAI NIRC TRAINING PROGRAMME FOR INDEPENDENT DIRECTORS, August 6 2006

18. Purpose • Accountability • Decision-making ICAI NIRC TRAINING PROGRAMME FOR INDEPENDENT DIRECTORS, August 6 2006

19. Content • Historical • Forward looking/predictive • Risks • Values • Health- Security- Liquidity- Profitability • Complexity • Conservative/Fair ICAI NIRC TRAINING PROGRAMME FOR INDEPENDENT DIRECTORS, August 6 2006

20. User expectations • Meaningful disclosures in the areas of: • Operational metrics in case of typical industries e.g IT • Contingent liabilities • Consolidated financial statements • Inter corporate holdings • Accounting for Minority Interest • Quality Notes to Accounts • Segmental analysis • Ratio analysis • Related party disclosures with quality info on: • Identity of related party and Nature & Terms of transaction ICAI NIRC TRAINING PROGRAMME FOR INDEPENDENT DIRECTORS, August 6 2006

21. CONTENTS THE REPORTING LANDSCAPE CAUSE AND EFFECT TYPES,ISSUES IN REPORTING & DISCLOSURE TOWARDS TRANSPARENCY IN REPORTING AND DISCLOSURE ROLE OF DIRECTORS IN RELATION TO CORPORATE REPORTING AND DISCLOSURE ICAI NIRC TRAINING PROGRAMME FOR INDEPENDENT DIRECTORS, August 6 2006

22. Transparency • Oxford English Dictionary – Transparent: easily seen through, recognized, understood, or detected; manifest, evident, obvious, clear and frank, open, candid, ingenuous • Transparent information results from applying several qualitative characteristics: faithful representation, neutrality, completeness, understandability ICAI NIRC TRAINING PROGRAMME FOR INDEPENDENT DIRECTORS, August 6 2006

23. Transparency in financial reporting “If you can’t convince them, confuse them”- Harry Truman “Put it before them briefly so they will read it, clearly so they will appreciate it, picturesquely so they will remember it and, above all accurately so they will be guided by its light” – Joseph Pulitzer ICAI NIRC TRAINING PROGRAMME FOR INDEPENDENT DIRECTORS, August 6 2006

24. Transparency in Financial Reporting – Key Elements • Basis of reporting • Assumptions • Unusual/non-recurring/extra-ordinary items • Key events • Changes to business structure, etc • Measurement metrices • Risks and their impact • Plain English • No fine print ICAI NIRC TRAINING PROGRAMME FOR INDEPENDENT DIRECTORS, August 6 2006

25. Disclosures and Reporting - Types • Governance related disclosures • Governance related reporting • Financial information disclosures • Attestation or other credibility enhancing reporting • Investor/investment related disclosures • Disclosures for regulators and for other national purposes ICAI NIRC TRAINING PROGRAMME FOR INDEPENDENT DIRECTORS, August 6 2006

26. Disclosures and Reporting – Key Issues • For whom ? • For what ? • What should one report? • What should be the medium of reporting? • Relevance • Reliability • Timing CREDIBILITY ICAI NIRC TRAINING PROGRAMME FOR INDEPENDENT DIRECTORS, August 6 2006

27. Disclosures and Reporting – For whom? • Disclosures to Boards • Disclosures to shareholders • Disclosures to regulators • Disclosures to potential investors • Disclosures to general public ICAI NIRC TRAINING PROGRAMME FOR INDEPENDENT DIRECTORS, August 6 2006

28. What should one report? • Reporting of information • Reporting compliance • Reporting by exception ICAI NIRC TRAINING PROGRAMME FOR INDEPENDENT DIRECTORS, August 6 2006

29. Disclosures and Reporting • Disclosures in Financial statements • Disclosures in Annual Reports • Disclosures in Offer documents • Disclosures in filings ICAI NIRC TRAINING PROGRAMME FOR INDEPENDENT DIRECTORS, August 6 2006

30. Clause 49 disclosures • Compensation philosophy and statement of entitled compensation in respect of non-executive directors • Details of shares held by non-executive directors, including on an “if converted basis” • Declaration by CEO that all Board Members and senior management comply with laid down code of conduct • Disclosure if accounting treatment is different from that prescribed in Accounting Standards ICAI NIRC TRAINING PROGRAMME FOR INDEPENDENT DIRECTORS, August 6 2006

31. Clause 49 disclosures • Affirmation that it has not denied any personnel access to the audit committee of the company and that it has provided protection of “whistle blowers” from unfair termination and other unfair or prejudicial employment practices • When money is raised through an Initial Public Offering disclosure of the uses/application of funds by major category on a quarterly basis. Further, on an annual basis, the company shall prepare a statement of funds utilized for purposes other than those stated in the offer document/prospectus ICAI NIRC TRAINING PROGRAMME FOR INDEPENDENT DIRECTORS, August 6 2006

32. Clause 49 disclosures • Pecuniary relationship or transactions of the non-executive director’s vis-à-vis the company to be disclosed in Annual Report • Remuneration to directors • Stock option details ICAI NIRC TRAINING PROGRAMME FOR INDEPENDENT DIRECTORS, August 6 2006

33. Management Discussion and Analysis contents • Industry structure and developments • Opportunities and Threats • Segment-wise or product wise performance • Outlook ICAI NIRC TRAINING PROGRAMME FOR INDEPENDENT DIRECTORS, August 6 2006

34. Management Discussion and Analysis contents • Risks and concerns • Internal control systems and their adequacy • Discussion on financial performance with respect to operational performance • Material developments in Human Resources/Industrial Relations front, including number of people employed ICAI NIRC TRAINING PROGRAMME FOR INDEPENDENT DIRECTORS, August 6 2006

35. Report on Corporate Governance • Brief statement on company’s philosophy on code of governance • Board of Directors • Audit Committee ICAI NIRC TRAINING PROGRAMME FOR INDEPENDENT DIRECTORS, August 6 2006

36. Report on Corporate Governance • Remuneration Committee • Shareholders Committee • General Body Meetings • Means of communication • General shareholder information ICAI NIRC TRAINING PROGRAMME FOR INDEPENDENT DIRECTORS, August 6 2006

37. Report on Corporate Governance • Disclosures on materially significant related party transactions that may have potential conflict with the interests of company at large • Disclosure of accounting treatment if different from accounting standards, with explanation • Details of non-compliance by company, penalties, strictures imposed on the company by Stock Exchange or SEBI or any statutory authority, on any matter related to capital markets during last three years • Whistle blower policy and affirmation that no personnel has been denied access to the audit committee ICAI NIRC TRAINING PROGRAMME FOR INDEPENDENT DIRECTORS, August 6 2006

38. CARO Reporting • End use of funds from financial institutions /banks/public issues • Use of short term funds for long term purposes • Defaults in repayments to institutions/banks • Frauds on or by the company ICAI NIRC TRAINING PROGRAMME FOR INDEPENDENT DIRECTORS, August 6 2006

39. Reporting and Disclosure Issues • Different GAAPs • Non-GAAP financial information • Data vs. information • Measurement matrices • Litigation concerns ICAI NIRC TRAINING PROGRAMME FOR INDEPENDENT DIRECTORS, August 6 2006

40. COMPLIANCE ISSUES • Letter vs. spirit • Form and substance • Competitive harm • Non-mandatory rules • Penalties ICAI NIRC TRAINING PROGRAMME FOR INDEPENDENT DIRECTORS, August 6 2006

41. CONTENTS THE REPORTING LANDSCAPE OBJECTIVES OF FINANCIAL REPORTING TYPES & ISSUES IN REPORTING AND DISCLOSURE TOWARDS TRANSPARENCY IN REPORTING AND DISCLOSURE ROLE OF DIRECTORS IN RELATION TO CORPORATE REPORTING AND DISCLOSURE ICAI NIRC TRAINING PROGRAMME FOR INDEPENDENT DIRECTORS, August 6 2006

42. Disclosure Trends • Disclosure of circumstances “reasonably likely to occur and not “more likely than not” • “Pro forma earnings” and non-GAAP information should include plain English reconciliation • Clear, complete and transparent disclosure • Focus on helping the reader understand the substance ofthe company’s risks and rewards ICAI NIRC TRAINING PROGRAMME FOR INDEPENDENT DIRECTORS, August 6 2006

43. Trends in Accounting Standards • New concepts – e.g. Deferred Taxation., Accounting for Investments based on Equity Method of Accounting • Relevant disclosures – e.g. Segment Reporting, Consolidated Financial Statements • Subjectivity – reliance on projections e.g. Impairment of assets • Complexity – AS 11 on Accountingfor Foreign Exchange transactions ICAI NIRC TRAINING PROGRAMME FOR INDEPENDENT DIRECTORS, August 6 2006

44. Recent and Emerging Trends in International Accounting Standards • Greater use of fair values in measuring transactions: • Impairment recognition. • Prohibit poolings. • Non-monetary exchanges. • Fair values on balance sheet for both financial and non-financial assets: • Financial Instruments. • Agriculture. • Investment property. • Commodity inventories. ICAI NIRC TRAINING PROGRAMME FOR INDEPENDENT DIRECTORS, August 6 2006

45. Recent and Emerging Trends in International Accounting Standards • More unrealised components of income: • Performance reporting becomes key. • No income smoothing, cost deferrals, general provisions: • Remove corridor approach to pensions. • Balance sheet approach to deferred tax. • No accruals for future losses. • Rigorous hedge accounting rules. ICAI NIRC TRAINING PROGRAMME FOR INDEPENDENT DIRECTORS, August 6 2006

46. Recent and Emerging Trends in International Accounting Standards • Eliminate off-balance sheet items: • Derivatives. • Special purpose entities. • Stock compensation. • More disclosure, especially judgements, plans, assumptions: • Judgement in applying accounting policies. • Risk management policies. • Sensitivity analyses. • Eliminate accounting choices. ICAI NIRC TRAINING PROGRAMME FOR INDEPENDENT DIRECTORS, August 6 2006

47. THE WAY FORWARD • Burial of Schedule VI • Modular financial statements • Measurement metrices • Analysis of Financial Position and Performance • Forward looking information • Disclosure of assumptions • Adieu to historical cost • Sensitivity analysis • Global language • Transparency ICAI NIRC TRAINING PROGRAMME FOR INDEPENDENT DIRECTORS, August 6 2006

48. Transparency in Financial Reporting Act of 2006 • Act passed by the U.S. House of Representatives • Requires SEC, PCAOB, etc to regularly: • reassess complex and outdated accounting standards • improve understandability, consistency and overall usability of the existing accounting and auditing literature • develop principles based accounting standards • encourage the use and acceptance of interactive data, and • promote disclosures in plain English ICAI NIRC TRAINING PROGRAMME FOR INDEPENDENT DIRECTORS, August 6 2006

49. CONTENTS THE REPORTING LANDSCAPE OBJECTIVES OF FINANCIAL REPORTING TYPES & ISSUES IN REPORTING AND DISCLOSURE TRENDS IN REPORTING AND DISCLOSURE ROLE OF DIRECTORS IN RELATION TO CORPORATE REPORTING AND DISCLOSURE ICAI NIRC TRAINING PROGRAMME FOR INDEPENDENT DIRECTORS, August 6 2006

50. ROLE OF INDEPENDENT DIRECTORS • Matters to be considered • What directors should seek • Conduct ICAI NIRC TRAINING PROGRAMME FOR INDEPENDENT DIRECTORS, August 6 2006