Building a robust
whistle-blowing mechanism
Fraud Investigation & Dispute Services
Building a robust whistle-blowing mechanism
On 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
Sec 177 (9)
•
Establishment
of “vigil
mechanism”
•
► very listed company, or such class or classes of
E
companies, as may be prescribed, to establish a
vigil mechanism for directors and employees to
report genuine concerns in such manner as may be
prescribed
Sec 177
(10)
•
Safeguards
against
victimization
•
Policy against victimization of persons using the
mechanism
•
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
•
A
► scertain and ensure that the company has an
adequate and functional mechanism
•
E
 nsure that the interests of individuals who use the
mechanism are not prejudicially affected
Schedule IV
•
Code for
independent
directors
Synopsis
The notified rules issued by the Ministry of Company Affairs on 27 March 2014 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 mechanism
Your concerns
While putting in place appropriate whistle-blowing mechanisms in their organizations, top
management typically grapples with the following issues:
Action to be taken?
Executive time and involvement
What action can be initiated
based on the nature and
seriousness of the issue
reported?
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 mechanism
Our experience
We have assisted our clients with the following:
• D
► eveloping or reviewing codes of conduct and related policies
• D
► eveloping or reviewing their whistle-blowing policies and related procedures
• F
► ormulating fraud-response plan
• I► mplementing their whistle-blowing mechanisms (either through third-party service
providers or by developing these internally)
• S
► trategizing their training initiatives and developing content for face-to-face and
web-based training sessions
• C
► onducting training sessions for their management teams and employees
• C
► onducting “train the trainer” sessions
• A
► ssisting 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 mechanism
How can EY assist you?
Your need
Challenges
EY’s solution
Establishing a
whistle-blowing
mechanism
•
What is the right policy?
•
•
► What is an appropriate mechanism?
•
W
► ho should be the owner?
•
Should a whistle-blowing platform be
outsourced?
•
H
► ow should reporting take place?
•
► hat are the protocols that can be
W
implemented for escalation and response
action?
•
► hat are the reporting protocols that can
W
be implemented?
Dealing with
complaints
•
W
► hat action should be initiated if a
complaint is filed?
•
Spreading
awareness
•
W
► ho should be trained?
•
•
What should be the strategy implemented?
•
► How can an employee be reinstated?
Reviewing
existing policy
or mechanism
Review to assist
declaration by
independent
directors
•
How do you ensure that your existing
policyand mechanism is effective?
•
How do you resolve challenges related
to effective response action, including
investigation, disciplinary action and
remediation?
•
How do you ensure that excessive time is
not spent by the executive (managerial)
team on such activities?
•
How do you identify complaints that could
be driven by a personal agenda or malafide
intent?
•
According to Schedule IV of the Companies
Act 2013, Independent Directors are
required to:
• A
► scertain and ensure that a company
has an adequate and functional
whistleblowing mechanism
•
•
•
•
A
► ssisting in selection of the most
suitable policy and mechanism
•
Helping in development of a fraud
response plan
•
► roviding assistance on constitution of
P
cross-functional committee
•
A
► dvising on response action
Assist in reviewing
complaints and
recommending
response
•
Providing advice with regard to effective
response action, including its scope and
Timeline
Conducting
training and
awareness
sessions
•
A
► ssisting in preparation of roll-out
Strategy
•
P
► roviding assistance in conceptualization
and development of training content for
face-to-face and web-based training
•
D
► elivering training — either to train
trainers or the target audience
•
► nderstanding and reviewing existing
U
policy and procedures
•
► eviewing data related to complaints
R
received, response action, remediation
measures
•
Reporting Identification of potential
areas of improvement
•
► ecommending changes in line with
R
industry practices and needs
•
R
eview reporting done to the audit
committee, board or regulatory body
► Assisting in
establishing
whistle-blowing
mechanisms
Conduct
diagnostic review
(assessment and
enhancement)
Reviewing vigil
mechanism
to support
Independent
directors
• E
► nsure that the interests of the
employees using the mechanism are not
prejudicially affected
Reviewing existing mechanism for the
existence, adequacy and functioning of the
mechanism
•
Reviewing sample cases reported through
the mechanism
•
Conducting surveys to assess whether
employees feel victimized
•
Conducting interviews of management and
employees independently
•
Reviewing reports of internal investigation
Our assistance
Building a robust whistle-blowing mechanism
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Contact details
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Direct: + 91 22 6192 0160
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Email: [email protected]
Jagdeep Singh
Partner
Direct: +91 20 6603 6119
Email: [email protected]
Building a robust whistle-blowing mechanism
Mukul Shrivastava
Partner
Direct: +91 22 6192 2777
Email: [email protected]