Building a robust whistle-blowing mechanism - Fraud Investigation & Dispute Services
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Building a robust
whistle-blowing mechanism
Fraud Investigation & Dispute Services
Building a robust whistle-blowing mechanismOn 30 August 2013, the much-awaited Companies Act, 2013
was published after receiving the assent of the President of India.
According to Section 177 of the Act, every listed company needs
to establish a vigil mechanism for its directors and employees to
report genuine concerns in the prescribed manner.
Following is a synopsis of provisions relating to the vigil mechanism in the
Companies Act, 2013, along with the notified rules:
Reference Provision Synopsis
Sec 177 (9) • Establishment • Every
► listed company, or such class or classes of
of “vigil companies, as may be prescribed, to establish a
mechanism” vigil mechanism for directors and employees to
report genuine concerns in such manner as may be
prescribed
Sec 177 • Safeguards • Policy against victimization of persons using the
(10) against mechanism
victimization
• Provide for access to Chairperson of Audit Committee
in appropriate or exceptional cases
• Display policy on the company website
• “Vigil mechanism” to be included in Board’s report
Schedule IV • Code for • A
► scertain and ensure that the company has an
independent adequate and functional mechanism
directors
• E
nsure that the interests of individuals who use the
mechanism are not prejudicially affected
The notified rules issued by the Ministry of Company Affairs on 27 March 2013 extend
this provision to companies that accept deposits from the public as well as to companies
that have borrowed funds amounting to more than 0.5 billion from banks and public
financial institutions.
Other provisions in the notified rules with regard to a vigil mechanism:
• Audit committee or board to oversee the vigil mechanism
• Reclusion of audit committee member(s) in the event of conflict
• Access to audit committee chairman in exceptional cases
• Actions against frivolous complaints
The provisions of the Section 177 are applicable with effect from 01 April 2014.
The revised Corporate Governance norms of SEBI have also made existence of
whistle-blower mechanism mandatory for listed Companies. The revised norms will
be made applicable to all listed Companies from 01 October 2014.
A whistle-blowing mechanism not only helps to detect fraud in organizations, but is also
used as a corporate governance tool, which prevents and deters fraudulent activity.
Several companies have whistle-blowing policies. However, these are not backed by
adequate framework to make them effective tools in detecting and preventing fraud or
misconduct.
1
According to EY’s India fraud Survey 2012, 58% of the companies
surveyed witnessed fraudulent activities in 2011. 62% of these indicated
that whistle-blowing tips helped in detection of the fraudulent activities.
1
Fraud and corporate governance: Changing paradigm in India, A report based on India Fraud Survey 2012,
Ernst & Young, 2012
Building a robust whistle-blowing mechanismYour concerns
While putting in place appropriate whistle-blowing mechanisms in their organizations, top
management typically grapples with the following issues:
Action to be taken?
What action can be initiated
based on the nature and
seriousness of the issue
reported?
Executive time and involvement
Issues that are “not serious”
taking up senior executives’
time
Potential misuse
Concern about potential
misuse of the channel, driven
by personal agendas
Compliance with laws/
regulatory guidance
Concern about compliance
of policies or procedures with
laws and regulatory guidance Global best practices
Concern about compliance
of policies or procedures
with global best practices
Effectiveness
Concern about
effective of the
mechanism What other
companies are doing?
Building a robust whistle-blowing mechanismOur experience
We have assisted our clients with the following:
• D
► eveloping or reviewing codes of conduct and related policies
• Developing
► or reviewing their whistle-blowing policies and related procedures
• Formulating
► fraud-response plan
• Implementing
► their whistle-blowing mechanisms (either through third-party service
providers or by developing these internally)
• Strategizing
► their training initiatives and developing content for face-to-face and
web-based training sessions
• Conducting
► training sessions for their management teams and employees
• Conducting
► “train the trainer” sessions
• Assisting
► management review and decide on the “way forward” for complaints
received through their whistle-blowing mechanisms
Our clients include:
► 1. A leading airline
2. A media and entertainment company
3. A leading newspaper brand
4. The finance arm of an automobile manufacturer
5. A pharmaceutical company
6. A leading global information technology company
7. A leading manufacturer of consumer electronics
Building a robust whistle-blowing mechanismHow can Ernst & Young assist you?
Your need Challenges EY’s solution Our assistance
Establishing a • What is the right policy? • ► Assisting in • ► ssisting in selection of the most
A
whistle-blowing • ► What is an appropriate mechanism? establishing suitable policy and mechanism
mechanism whistle-blowing
• Who
► should be the owner? • Helping in development of a fraud
mechanisms
• Should a whistle-blowing platform be response plan
outsourced? • Providing
► assistance on constitution of
• How
► should reporting take place? cross-functional committee
• What
► are the protocols that can be • ►
Advising on response action
implemented for escalation and response
action?
• What
► are the reporting protocols that can
be implemented?
Dealing with • W
► hat action should be initiated if a • Assist in reviewing • Providing advice with regard to effective
complaints complaint is filed? complaints and response action, including its scope and
recommending Timeline
response
Spreading • Who
► should be trained? • Conducting • A
► ssisting in preparation of roll-out
awareness • What should be the strategy implemented? training and Strategy
awareness • P
► roviding assistance in conceptualization
• ► How can an employee be reinstated?
sessions and development of training content for
face-to-face and web-based training
• D
► elivering training — either to train
trainers or the target audience
Reviewing • How do you ensure that your existing • Conduct • Understanding
► and reviewing existing
existing policy policyand mechanism is effective? diagnostic review policy and procedures
or mechanism • How do you resolve challenges related (assessment and • Reviewing
► data related to complaints
to effective response action, including enhancement) received, response action, remediation
investigation, disciplinary action and measures
remediation? • Reporting Identification of potential
• How do you ensure that excessive time is areas of improvement
not spent by the executive (managerial) • Recommending
► changes in line with
team on such activities? industry practices and needs
• How do you identify complaints that could
be driven by a personal agenda or malafide
intent?
Review to assist • According to Schedule IV of the Companies • Reviewing vigil • Review reporting done to the audit
declaration by Act 2013, Independent Directors are mechanism committee, board or regulatory body
independent required to: to support • Reviewing existing mechanism for the
directors Independent existence, adequacy and functioning of
• Ascertain
► and ensure that a company
has an adequate and functional directors the mechanism
whistleblowing mechanism • Reviewing sample cases reported
• Ensure
► that the interests of the through the mechanism
employees using the mechanism are not
prejudicially affected • Conducting surveys to assess whether
employees feel victimized
• Conducting interviews of management
and employees independently
• Reviewing reports of internal
investigation
Building a robust whistle-blowing mechanismOur offices
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