There are large number of family enterprises in India involved in trading, transport, agriculture and even small scale manufacturing. These enterprises taken all together constitute large percentage of domestic GDP besides giving employment to millions of unskilled and semi-skilled workers. This sector is also called as informal sector.
Some of these entities have also upgraded themselves into private limited companies with themselves becoming shareholders and directors. The main principles of Companies Act revolves around the premise of safeguarding the interest of owners, i.e. shareholders. As the management rests with the Directors. Auditors are appointed by the shareholders to oversee and report over the statement of accounts prepared by the management, i.e. Directors. But, in most of the cases, the line between Directors and Shareholders is broken by way of both belonging to same family or group. The role of the Auditor in these cases becomes a statutory requirement and not as a watchdog over the management. This has also led to a belief that role of statutory auditor does not include efficacy of management decisions. Form of reporting has taken precedence over the substance of reporting.
This has also led to drawing up the accounts to meet the requirements of various statutes like Companies Act, Income Tax Act etc. or even to meet the parameters of lenders and investors. The absence of real financial statements has also led to more business failures. This has become more important in today's contest, where many old family businesses are showing cracks due to varied interests of family members.
Equity participation by friends, employees and family members outside those involved in day to day management will lead to asking for more transparent reporting of financial statements. This will lead to better business accountability.
This will also help these entities to source more funds from outside sources. Even if 5% of the informal sector opens up, it will create much more competitive business environment.
