NIRC of the Institute of Chartered Accountants of India

1. NIRC of the Institute of Chartered Accountants of India SEMINAR ON INTERNAL AUDIT AND RISK MANAGEMENT INTERNAL CONTROLS – WHY THEY FAIL DINESH BAHL SAHNI NATARAJAN AND BAHL dineshbahl@snbindia.com January 14, 2012

2. An Effective Internal Control System A Risk Assessment and Management System A Legal Compliance System An adequate system of Internal audit Made the Auditor duty bound to report the absence or inadequacy of internal controls and internal audit Provided for the CEO & CFO to certify the Satisfactory working of the internal controls Required the Directors to confirm that they have reviewed the existence, adequacy as well as for monitoring of all the above Charged the management with Reporting of frauds to the auditors and the Audit Committee Etc. etc. etc.

3. Changes to the listing regulations and the Companies Act have equated white collar crime with other criminal acts

4. We all tend to return to “Business as Usual” state and wish to forget the bad incidents.

5. Tone at the top Design Defects Inappropriate understanding of the fall outs Lack of will, guts & motivation Controls seen as irritants Discouraging past experience Present more important than future Rationalizing deviant behaviour Pride precludes consultation Work diffusion leads to diffusion of responsibility

6. Tone at the top Design Defects Inappropriate understanding of the fall outs Lack of will, guts & motivation Controls seen as irritants Discouraging past experience Present more important than future Rationalizing deviant behaviour Pride precludes consultation Work diffusion leads to diffusion of responsibility

7. TONE AT THE TOP Fraud prevention involves not only putting into place effective accounting and operational controls, but also fostering an ethical culture that encourages employees and contractors at all levels to play their part in protecting public resources. Establishing an ethical culture is a key element of sound governance and is an important factor in preventing fraud and helping to detect it occurs.

8. TONE AT THE TOP Develop the ability to hear and speak the truth

9. Tone at the top Design Defects Inappropriate understanding of the fall outs Lack of will, guts & motivation Controls seen as irritants Discouraging past experience Present more important than future Rationalizing deviant behaviour Pride precludes consultation Work diffusion leads to diffusion of responsibility

10. Tone at the top Design Defects Inappropriate understanding of the fall outs Lack of will, guts & motivation Controls seen as irritants Discouraging past experience Present more important than future Rationalizing deviant behaviour Pride precludes consultation Work diffusion leads to diffusion of responsibility

11. INAPPROPRIATE UNDERSTANDING OF THE FALL OUTS ZERO EXCUSE FOR NON-COMPLIANCE Companies do take care while designing operating and control policies but even the best of the policies do not help if not followed.

12. Tone at the top Design Defects Inappropriate understanding of the fall outs Lack of will, guts & motivation Controls seen as irritants Discouraging past experience Present more important than future Rationalizing deviant behaviour Pride precludes consultation Work diffusion leads to diffusion of responsibility

13. LACK OF WILL, GUTS & MOTIVATION SunTzu Chinese Military General ZERO TOLERANCE

14. LACK OF WILL, GUTS & MOTIVATION Zero Tolerance imposes automatic punishment for infractions of a stated rule, with the intention of eliminating undesirable conduct.

15. LACK OF WILL, GUTS & MOTIVATION Zero Tolerance policies forbid persons in positions of authority from exercising discretions or changing punishments to fit the circumstances subjectively;

16. Tone at the top Design Defects Inappropriate understanding of the fall outs Lack of will, guts & motivation Controls seen as irritants Discouraging past experience Present more important than future Rationalizing deviant behaviour Pride precludes consultation Work diffusion leads to diffusion of responsibility

17. CONTROLS SEEN AS IRRITANTS Managers are Trustees. Reinventing the wheel? As early as 1776, Adam Smith in his famous Wealth of Nations warned against issues arising from the then new joint-stock companies: The directors of each companies, however, being the managers of other peoples’ money rather than their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which partners in a private company frequently watch over their own…. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.

18. Tone at the top Design Defects Inappropriate understanding of the fall outs Lack of will, guts & motivation Controls seen as irritants Discouraging past experience Present more important than future Rationalizing deviant behaviour Pride precludes consultation Work diffusion leads to diffusion of responsibility

19. DISCOURAGING PAST EXPERIENCE lfpocSnxq# rhfu tksfç; cksyfgaHk; vkl jkt /keZrurhUghgks; csxghauklA

20. Napoleon Bonaparte had observed ‘The people to fear are not those who disagree with you, but those who disagree with you, and are too cowardly to let you know. DISCOURAGING PAST EXPERIENCE

21. Tone at the top Design Defects Inappropriate understanding of the fall outs Lack of will, guts & motivation Controls seen as irritants Discouraging past experience Present more important than future Rationalizing deviant behaviour Pride precludes consultation Work diffusion leads to diffusion of responsibility

22. Tone at the top Design Defects Inappropriate understanding of the fall outs Lack of will, guts & motivation Controls seen as irritants Discouraging past experience Present more important than future Rationalizing deviant behaviour Pride precludes consultation Work diffusion leads to diffusion of responsibility

23. RATIONALIZING DEVIANT BEHAVIOUR “Rationalizing is just an excuse to justify our weaknesses. It’s, however, important to realize that everything is not under one’s control. But, that again, is no excuse to avoid what is actually under our control.” NARAYANAMURTHY

24. RATIONALIZING DEVIANT BEHAVIOUR MINDSET CHANGE Organizations are like elephants - they both learn through conditioning

25. Tone at the top Design Defects Inappropriate understanding of the fall outs Lack of will, guts & motivation Controls seen as irritants Discouraging past experience Present more important than future Rationalizing deviant behaviour Pride precludes consultation Work diffusion leads to diffusion of responsibility

26. PRIDE PRECLUDES CONSULTATION MINDSET CHANGE “The significant problems we face cannot be solved at the same level of thinking we were at when we created them.”

27. Tone at the top Design Defects Inappropriate understanding of the fall outs Lack of will, guts & motivation Controls seen as irritants Discouraging past experience Present more important than future Rationalizing deviant behaviour Pride precludes consultation Work diffusion leads to diffusion of responsibility

28. THANK YOU