Role of CFO comes with great responsibilities in the company. Considered as Key Managerial Person of the company it’s role and responsibilities are defined under the Companies Act, 2013 and SEBI (LODR) Regulations, 2015. Further to strengthen the Corporate Governance in the company CFOs shall bring out the material discrepancies found in the Financial Statements depicting the true and fair position to the Investors.

Before we delve into the involvement of CFOs in Corporate Fraud and mechanism to track CFOs involvement in frauds, first let’s see it’s role and responsibilities from the legal perception under Companies Act, 2013 and SEBI (LODR) Regulations, 2015 and under Corporate Governance.

  • The term CFO is defined under Section 2(18) of the Companies Act, 2013; “Chief Executive Officer” means an officer of a company, who has been designated as such by it and Section 2(51)(i)of the Companies Act, 2013 includes CFO as Key Managerial Personnel of the company.
  • As per Section 102(4) of the Companies Act, 2013, proper disclosure shall be made in the statement if any benefit accrues to such promoter, director, manager or other key managerial personnel or their relatives either directly or indirectly, then the CFO/CEO shall hold such benefit in trust for the company , and shall, without prejudice to any other action being taken against him under this Act or under any other law for the time being in force, be liable to penal consequences and compensate the company to the extent the benefit received by him.
  • The company law provides the authority to sign the Financial Statement (including Consolidated Financial Statement) to CFO under Section 134(1) of the Companies Act, 2013.
  • Company law slams CFO with penal consequences in case of failure to file copy of Financial Statements before prescribed period under Section 137(3)of the Companies Act, 2013.
  • CFO entrusted with a legal obligation to disclose his interest or concern in other associations which are required to be included in the Register or such other information relating to himself which shall be complied within thirty days of appointment or relinquishment of Office.
  • Where any Insurance taken on behalf of CEO/CFO for indemnifying any of them against any liability in respect of any negligence, default, misfeasance, breach of duty of trust for which they may be guilty in relation to the Company premium shall not be treated as part of remuneration payable to such personnel under Section 197(13)of the Companies Act, 2013.
  • Remuneration of CFO shall be recovered in case company has to restate its financial statements due to fraud or non-compliance as per the requirement of the act,the Company shall recover from any past or present CFO under Section 199 of the Companies Act, 2013.
  • CFO is prohibited to hold office in more than one company except in its Subsidiary company at a time under Section 203(3)of the Companies Act, 2013.
  • Where fraud has taken place in a company and due to such fraud CFO has taken undue advantage or benefit whether in the form of any asset, property or cash or in any other manner then CFO shall be liable personally without any limit under Section 224(5)of the Companies Act, 2013.
  • CFO entrusted with responsibility for furnishing compliance certificate to the Board of Directors under Regulation 17(8) under SEBI (LODR) Regulations, 2015. The Chairman CMD and CFO of the Company shall give annual certification on financial reporting and internal controlsto the Board in terms of Regulation 17(8) of the Listing Regulations. The CMD and the CFO also give quarterly certification on financial results while placing the financial results before the Board in terms of Regulation 33(2) of the Listing Regulations.
  • Obligation under Regulation 26(6)of SEBI (LODR) Regulations, 2015 that CFO shall not enter into any agreement for himself or on behalf of any other person, with any shareholder or any other third party with regard to compensation or profit sharing in connection with dealings in the securities of such listed entity, unless prior approval for the same has been obtained from the Board of Directors as well as public shareholders by way of an ordinary resolution.
  • Regulation 30(5)of SEBI (LODR) Regulations, 2015 entrusts the board of directors of the listed entity to authorize Key Managerial Personnel to determining materiality of an event or information for the purpose of making disclosures to stock exchange(s) under this regulation.
  • Frauds/defaults by Key Managerial Personnel of a listed entity shall be reported to stock exchange by the entity without any application of guidelines for materiality as specified under Regulation 30(4)of SEBI (LODR) Regulations, 2015.

Role of CFO in Corporate Governance

Crackdown on economy due to high profile scams, the need for corporate governance was felt and role of CFO changed rapidly. Therefore, in an era of dynamic environment, role of CFO in a company has undergone a sea change. Being the public figure of the company for investors, regulators and policy makers plays an important role in assurance and transparency in corporate reporting. The CFO should adopt a ‘substance over form’ approach which will focus on the principles and shall report both compliance and non-compliance to demonstrate commitment to good practice in both governance and financial management. CFO plays a pivotal role in restoring public trust and he had to serve as a bridge between the CEO and Board on strategic and governing/compliance matters.

Role of a CFO in finance machinery of corporates

Company strategy and performance: The CFO also is responsible for overseeing the budget process, collecting inputs, and comparing the company’s actual performance with estimates (i.e., the budget).

Cash flow: Overseeing a company’s cash flow position is the most important role a new CFO has to play in any company. He or she must understand the sources and uses of cash, and maintain the integrity of funds, securities, and other valuable assets.

Liabilities: After cash flow, a CFO’s responsibility is to understand all of the company’s liabilities. A company has many legal contracts, statutory and tax obligations, hidden liabilities (e.g., contingencies, leases, or insurance summaries), and expectations from loan covenants and the board of directors.

Financial Obligations:  A CFO needs to approve all agreements concerning financial obligations, such as contracts for raw materials, IT assets, services, and other actions requiring financial resources.

Record control: The CFO is responsible for the financial aspects of all company transactions and ensures the maintenance of appropriate financial records, prepares required financial reports, and ensures audits are completed on time and statutory book closing

Present Process in companies act for appointment of CFO

Appointment of KMP under Section 203(2) of the Companies Act, 2013, shall be made by passing a resolution of the Board containing the terms and conditions of the appointment including the remuneration. After appointment, Company shall file the particulars of appointment of CFO to ROC:

Form DIR-12 within 30 days of such appointment along with the following documents like Certified true copy of the Board Resolution, Letter of Appointment and any other relevant document. In Form DIR-12 Details of DIN if allotted or valid Income-tax PAN of manager(s), secretary(s), Chief financial Officer or Chief Executive Officer of the company shall be furnished. It is mandatory to enter PAN if user not mentioning DIN.

Every Listed Company and every other Public Company shall file a copy of Board Resolution with the ROC in Form MGT-14 within 30 days of passing of such resolution.

Flaws in the current system and laws, increasing involvement of CFO in frauds:

  • At present CFO’s are provided with unique identity no. like DIN in case of directors. Therefore, making it very difficult to track past records of a CFO.
  • In many fraud cases, it was observed that CFO resigned before the initiation of fraud investigation proceeding. Even resignation of a key person like CFO is a red flag in itself.
  • In current scenario, it is very difficult to track background of CFOs making it easier to for CFO’s to hide their wrongdoings.

Possible ways track past records of CFOs :

  • CFO committing a fraud in one company, his history shall be traced to identify in which all companies he committed fraud in the past and his involvement in future companies.
  • Regulators like MCA and SEBI shall bring strict provisions to trace the involvement of CFOs in Corporate Frauds.
  • NCLT shall also maintain database of CFOs and their profile committing fraud in the companies. To identify in all companies CFO failed to meet its debts.
  • CFO resigning from a company shall state the reasons for its resignation to the regulators and company to identify his ill motives. Overnight resignation can be an indication of fraud committed by CFO in a company.
  • CFO being close relative of Promoters may question the integrity of CFO’s role and may be guided by the Promoters as per their whims and fancies which can be dreadful for the Company.
  • CFO having the key information of the company may reveal all the sensitive information in the public like Insider trading which is an indication of fraud.
  • CFO shall intimate material discrepancies occurred in the financial statements to the regulators failing which CFO shall be held liable for penal consequences.
  • Any compliant of Promoter or CFO by any whistle blower shall be investigated by the authority and in that case CFO shall be discharged from its role and responsibilities till the closure of an Investigation.
  • Company shall provide assistance to the investigation authority failing to do so will hold CFO liable with penal consequences exceeding its personal liability as well.
  • CFO role and responsibilities shall be limited to few years in a company. Having same CFO for ten to fifteen years in one company might commit financial frauds. Law shall fixed its term.

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June 2021