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    Summary:

     

    • Without following principles of natural justice no punishment should be imposed on the employee.

     

    • Punishment should not be different to different employees who has committed the same or similar misconduct.

     

    • In determining the quantum of punishment the Management should treat all the employee equally and there shall be no discrimination.

     

    • The enquiry officer must be an independent person who is totally un-connected to the dispute and not an interested party in the outcome of the dispute.

     

    • When an employee commits misconduct for personal gain punishment of dismissal is appropriate.

     

    • When the acts of an employee adversely affect the interests of the company, it is nothing but gross misconduct and punishment of dismissal is appropriate.

    The Management of an industrial establishment has a right to exercise control over its employees. Employer employee relationship rests on the overall control that an employer is entitled to exercise over his employees, not only in regard to their work in the establishment but also in regard to their conduct and behaviour in relation to the performance of work. It also includes his attitude towards his co-workers, supervisors, outsiders with whom the employee may come into contact in relation to the performance of work. Without disciplinary control being exercised by the employer, work cannot run smoothly and efficiently.

     

    Maintenance of discipline in an industrial establishment is the core on which the survival and growth of an industry depends. At the same time employer has no right to ‘hire and fire’ an employee at his whims and fancies. Employer has no right to dismiss an employee from the services of the company for his acts of misconduct without following the procedures laid down in the Industrial Employment Standing Orders and in cases where the Standing Orders are not applicable in accordance with the rules framed by the company within the framework of law. Hence disciplinary proceedings are an essential part of maintenance of discipline in the industry.

     

    In a recent judgement the Supreme Court in the matter of Pawan Kumar Agarwala Vs General Manager, State Bank of India & Others held as under:

    Disciplinary Proceedings are liable to be set aside in case the delinquent is not supplied the copies of the documents, relied upon by the employer and list of witnesses for proving the charges since it is violation of principles of natural justice.

     

    Enquiry is liable to be vitiated if the enquiry proceedings are conducted in violation of Employer’s relations or applicable standing orders.

     

    Punishment is discriminatory if similarly situated another delinquent employee is let off lightly with stoppage of increment.

     

    Discriminatory punishment is liable to be vitiated.

     

    Misconduct would not stand proved, in respect of those charges which were not held to be proved by the Enquiry Officer, without giving an opportunity to the delinquent by the Disciplinary Authority to show cause as to why the finding on such charges should not be reversed.

     

    Let us look at what are the Principles of Natural Justice.

     

    The principles of natural justice mean the principles relating to the procedure required to be followed by authorities entrusted with the task of deciding disputes between the parties when no procedure is laid down by law. Through various pronouncements by the Supreme Court the following rules have been evolved over a period on the subject:

     

    1. No one shall be a judge in his own cause.

     

    1. Hear the other party. No one should be condemned unheard. A person must be given a fair opportunity to defend himself or to present his side of the case.

     

    1. Decision must be made in good faith.

     

    The Supreme Court in the matter of Sur Enamel and Stamping Works Ltd Vs Workmen laid down with regard to domestic enquiries as under:

     

    • The employee proceeded against has been informed clearly of the charges levelled against him.

     

    • The witnesses are examined in the presence of the employee in respect of the charges.
    • The employee is given a fair opportunity to cross-examine witnesses.

     

    • The employee is given a fair opportunity to examine witnesses including himself in his defence.

     

    • The enquiry officer records his findings with reasons for the same in his report.

     

    In the matter of A C C Ltd Vs Workmen it was held by the Supreme Court that if an officer himself sees the misconduct of a workman, it is desirable that the enquiry should be left to be held by some other person who does not claim to be an eye-witness of the incident. Domestic Enquiries must be conducted honestly and bona fide with a view to determine whether the charge framed against a particular employee is proved or not and so care must be taken to see that these enquiries do not become empty formalities.

     

    The Supreme Court in the matter of UP State RTC Vs Gopal Shukla (2016 LLR 113) held that when the employee committed misconduct for his personal gain, the punishment of dismissal is appropriate. The same is elaborated hereunder.

    When the misconduct reflects that the employee has committed the same for his personal gains causing loss to his employer or the employee loses the confidence of the employer, the nature of misconduct would be grave and serious. Punishment of dismissal from service is justified if the Management has lost confidence upon employee due to his grave and serious misconduct.

     

    In determining the quantum of punishment the Management should be fair and treat all the employee equally. There shall be no discrimination among the employee. The Supreme Court in the matter of AK Saxena Vs State Bank of Patiala (2016 LLR 485) held that dismissal from services of one employee out of four involved in commission of fraud is not justified only on the ground that other three have been put to face criminal trial or they were obeying his request for consequential steps or he was a kingpin of the whole transaction.

     

    Dismissing one employee out of four involved in commission of fraud amounts to his discrimination and hence not sustainable in law.

     

    The Supreme Court in the matter of Jagdish Lal Gambhir Vs Punjab National Bank ( 2016 LLR 84) held that Dismissal from service of bank officer is justified for deliberately flouting the Bank norms thereby accommodating some parties by putting huge funds of the bank at stake which proves that he has failed to discharge his duties with utmost integrity, honesty, devotion and diligence. In another case State Bank of Patiala Vs General Secretary, Staff Union (2016 LLR 1121 ) held that any act on the part of the workmen, adversely affecting the interest of the bank, is nothing but a gross negligence on his part, justifying major punishment of dismissal from service.

     

    Reference : Labour Law Reporter (2016) & Supreme Court on Industrial Employment

    Introduction:

     

    At present, cross border services received by any individual or by Government or local authorities which are not in relation to business or commerce are exempt from service tax. Online database, access or retrieval services (hereinafter referred to as ‘OIDAR services’) provided by entities located outside India are not subject to service tax as the law with respect to place of provision of these services envisages that location of service provider is the place of provision of service which will be outside India. Further, these services are defined in a confined manner limiting to activities of providing data or information which is retrievable or otherwise to any person through a computer network. This legal position has now undergone sizable change with effect from 01.12.2016 as discussed hereunder

     

    Scope and Ambit of OIDAR Services:

     

    The term, ‘Online Information, Database, Access or Retrieval Services’ was defined under Rule 2(l) of the Place of Provision of Service Rules, 2012. This definition is now withdrawn from these rules and a new definition is inserted under clause (ccd) of sub-rule 1 of rule 2 of the Service Tax Rules, 1994. The comparative analysis of both the definitions is as under;

     

     

    Definition under Rule 2(l) of Place of Provision of Service Rules, 2012 (Withdrawn w.e.f 01.12.2016)

     

    ‘Online information and database access or retrieval services’ means providing data or information, retrievable or otherwise, to any person, in electronic form through a computer network.

     

    Definition under clause (ccd) of sub-rule 1 of rule 2 of Service Tax Rules, 1994 (effective from 01.12.2016)

     

    ‘Online Information Database Access or Retrieval Services’ means services whose delivery is mediated by information technology over the internet or an electronic network and the nature of which renders their supply essentially automated and involving minimal human intervention, and impossible to ensure in the absence of information technology and includes electronic services such as

     

    • advertising on the internet (ii) providing cloud services

    (iii) provision of e-books, movie, music, software and other intangibles via telecommunication networks or internet

     

    (iv) providing data or information, retrievable or otherwise, to any person, in electronic form through a computer network

     

    (v) Online supplies of digital content (movies, television shows, music, etc.) (vi) digital data storage

     

    (vii) Online gaming

    On a comparative study of earlier definition with the current definition, the earlier definition is limited to services relating to providing access to a repository of data/information held by service provider including retrieval of information through a computer network. The present definition provides that in addition to these services also includes within its ambit services like advertising on the internet, cloud services, online gaming services. These may not be technically called OIDAR services as the service provider need not possess a repository of data/information to provide these services but the new definition has specifically included these services within its ambit.

     

    A circular No. 202/2016-ST dated 09.11.2016 is issued in this regard. Accordingly, it has been clarified that these services include supply of software, images, text, information, music, films website hosting etc. where the services are provided through computer network with minimal human intervention. It has also clarified that information shared through electronic means by human intervention viz. information commissioned individually or otherwise sent manually through email (other than system generated emails), video lectures with tutor support are covered under the ambit.

     

    Place of Provision of OIADR Services:

     

    Rule 9 of the Place of Provision of Services Rules, 2012 provides that the place of provision of specified services is the location of the service provider. OIADR services were one of the specified services. This rule is now amended to exclude OIADAR services from the specified services. As a result of this exclusion, the place of provision of OIADR services is governed by general rule i.e. Rule 3.

     

    In terms of this Rule 3, the place of provision of services in general is the location of the service receiver. Where the location of service receiver is not available in the ordinary course of business (where services are of B2C nature), the place of provision of services is the location of service provider. Consequently, in case of B2B services i.e. services received by business entities, the place of provision of services are the location of service receiver.

     

    Eg: XYZ Ltd of Hyderabad is using the services of linkedin.com to advertise for their recruitment needs. The service is of the nature of OIDAR and service provider linkedin.com is located in USA. As the service is provided between two B2B entities, the location of service receiver i.e. XYZ Ltd is the place of provision of service i.e. Indian taxable territory. Accordingly, said service is taxable in India.

     

    Rule 3 is also undergone change with effect from 01.12.2016. Accordingly, in case of OIDAR services of B2C nature where the location of service receiver is not available in ordinary course of business, the place of provision of service will still be considered as location of service receiver instead of service provider.

     

    Thus, in view of the above mentioned amendment to Rule 3 of the Place of Provision of Service Rules, 2012, the place of provision of OIDAR services shall always be considered as location of service receiver irrespective of the fact whether services are of the nature of B2B or B2C.

     

    In view of the changed legal position, say in the above example instead of XYZ Ltd, say Mr. X of Hyderabad, an IT job aspirant has used the premium services of LinkedIn account in order to find better job offers that suits his profile, the service recipient though a non-business entity, still the place of provision of service shall be considered as location of service receiver. Accordingly, the saidservice becomes taxable in India. As to who has to pay tax in case of B2C scenarios is explained hereunder.

    Taxability of Cross Border OIDAR Services received by non-business entities:

     

    Entry 34(a) of Notification 25/2012-ST dated 20.06.2012 provides exemption for services received from a provider of service located in non-taxable territory by Government, a local authority, a governmental authority or an individual in relation to any purpose other than commerce, industry or any other business or profession. Now this notification is amended to ensure that this exemption is not applicable for OIDAR services received from a person located outside the taxable territory.

     

    In view of exemption under entry 34(a), service tax is required to be paid for OIDAR services received by Government, local authority or a Governmental authority or an individual in relation to any purpose other than commerce, industry or any other business or profession.

     

    Applicability of Reverse Charge/Forward for Cross Border Services:

     

    In terms of section 68 of Finance Act, 1994, service provider is required to collect and pay service tax to the Central Government (forward charge) and with respect to certain notified services, service receiver is required to pay service tax directly to Central Government(reverse charge). The notified list of services for reverse charge are given under Notification 30/2012-ST dated 20.06.2012.

     

    Accordingly, in terms of this notification, any taxable service provided by a person located in non-taxable territory to a person located in taxable territory, the service recipient in the Indian taxable territory is liable to pay service tax in India under reverse charge. Now this notification is amended to provide that no reverse charge is applicable in case of online database access or retrieval services received by a non-assessee online recipient.

     

    Non-assessee online recipient is defined for this purpose to mean Government, a local authority, a governmental authority or an individual receiving OIDAR services in relation to any purpose other than commerce, industry or any other business or profession, located in taxable territory. In fact these are the persons who are not entitled to exemption under entry 34(a) for OIDAR services received from a person located in non-taxable territory.

     

    Thus in view of the above amendment, if cross border OIDAR services are received by a business entity (other than non-assessee online recipient) located in Indian taxable territory, reverse charge mechanism is applicable. Accordingly, the Indian business entity is required to pay service tax under reverse charge mechanism. In the above example relating to services received by XYZ Ltd from LinkedIn, USA, the service tax is required to be paid by XYZ Ltd under reverse charge.

    On the other hand, in case non-business online recipient, no service tax is required to paid by Mr.X for receiving services from LinkedIn, USA. The applicable service tax in case of cross border OIADR services provided to non-business online recipient shall be subject to forward charge in the manner explained below:

     

     

    Sl.No

    Nature of Service

    Person liable to ST

     

     

     

    1

    Services are provided by a person

    Intermediary

     

     

    located outside the taxable territory

     

     

    through an intermediary other than

     

     

    specified intermediary*

     

     

     

     

    2

    Services  provided  by  a  person

    Service provider located in non-taxable territory in

     

     

    located outside the taxable territory

    the following manner:

     

    through a specified intermediary* or

    (i)  A representative if any exists in India to provide

     

    directly to the non-assessee online

    such services, such representative

     

    recipient

    (ii) In the absence of such representative, but

     

     

    representative has been appointed in taxable

     

     

    territory  for  any  other  purpose,  such

     

     

    representative in India

     

     

    (iii) In any other case, the service provider has to

     

     

    appoint a person in taxable territory for the

     

     

    purpose of service tax payment

     

     

     

     

    Note: Specified intermediary is the one who satisfies all of the following conditions:

     

    (a)the invoice or customer's bill or receipt issued or made available by such intermediary taking part in the supply clearly identifies the service in question, its supplier in non-taxable territory and the service tax registration number of the supplier in taxable territory;

     

    (b)the intermediary involved in the supply does not authorise the charge to the customer or take part in its charge i.e. intermediary neither collects or processes payment in any manner nor is responsible for the payment between the non-assessee online recipient and the supplier of such services;

     

    (c)the intermediary involved in the supply does not authorise delivery;

     

    (d)the general terms and conditions of the supply are not set by the intermediary involved in the supply but by the service provider

    The following table sums up the entire provisions relating to payment of service tax in case of cross border OIDAR services.

    Conclusion:

     

    Taxation of digital services is been undergoing rapid change over the last two years which has been identified as one major untapped area to collect taxes. The companies involved in this business are tapping huge revenue from the customer base in India but are not paying any direct or indirect taxes as they are located outside India. Introduction of equalisation levy under direct taxes, service tax payment under reverse charge by aggregator are the significant steps in this direction to ensure appropriate taxes are paid to Indian Government as the revenue is being generated from customer base in India. The changed legal position over OIDAR services where the non-resident service provider is obligated to pay service tax in India through authorised representatives can also be considered as one more major step in this regard to ensure that appropriate revenue to the Indian Government. Some more changes with respect to taxability of the digital services are expected.

    The movement from existing regime to GST regime is gaining certainty with passing of each day. The recent council meetings give a sense of hope that the law shall be made effective from April, 2017. With GST around the corner, we would like to dwell upon on one of the transitional provisions under the revised model GST law made available in November, 2016. Among the set of transitional provisions, the section which is the subject matter of this article assumes highest significance since it is applicable to majority of the assessees and deals with the transition of credit from existing regimes to the GST regime.

     

    Section 167 of the revised model GST law deals with ‘Amount of Cenvat Credit carried forward in a return to be allowed as input tax credit’. The salient features of Section 167 are discussed as under.

     

    As per Section 167, every person other than who has opted for composition under GST, shall be entitled to take the credit in his electronic credit ledger, the amount of cenvat credit/VAT/Entry Tax carried forward in the returns relating to the period ending with the day immediately preceding the appointed day, furnished, by him under the earlier laws in such manner as may be prescribed. The section has a proviso which states that the credit shall be allowed only if such credit which is being carried forward is eligible also under GST laws.

     

    On a plain reading of the section, it is clear and unambiguous. However, the most disturbing condition is that the credit shall be allowed only if it is carried forward in the returns under the earlier laws. That is to say, for any reason, credit which is eligible under the old laws and GST laws is not shown in the returns under the old laws then such credit shall not form part of the electronic credit ledger under GST except such credit is allowed under any other specific transitional provisions. For example, service provider is eligible to take cenvat credit on capital goods only to the extent of 50% in the first year and the remaining credit can be availed in the next year subject to certain other conditions. However, the service provider while filing the returns for the period ended 31.03.2017 will show only the first 50% credit and the remaining balance will not appear in the returns. In such case, the service provider in the GST regime that is post 01.04.2017 (assuming GST kicks in from April, 2017) can avail the balance credit in light of specific Section 168 which deals with such instances.

     

    In all other cases, where there are no specific sections under the transitional provisions which deal with the movement of credit, then the credit has to be part of the returns under the earlier law, otherwise such credit would lapse. In this article, we shall address certain issues to understand the implications under Section 167.

     

    Issue 1: Our company has eligible credit under the earlier laws. However such credit has been not shown in the VAT/ST/CE returns before the appointed day? Can the company avail credit under the GST laws in the GST returns?

     

    Response: No. On a strict reading of the section, the credit which shall be allowed to carry forward should be from the returns. If the credit even though eligible under GST laws is not shown in the returns furnished under the earlier laws, the same shall not be allowed.

    Issue 2: Our company has credits under the service tax law which are eligible, however on reading of the model GST law, such credits are excluded. Shall I be eligible to carry forward such credit?

     

    No. One of the important condition as per Section 167, the credits shall be eligible under the GST laws.

     

    Hence, such credit shall not be allowed.

     

    Issue 3: Our company has paid service tax to the vendors for certain services for which credit has been availed. An audit party has stated that such credit is not eligible under the definition of ‘input service’ and asked us to reverse the credit and we have reversed for that period. However, our management has a view that such credit is eligible and decided to avail the same for the subsequent period. What should we do?

     

    Since your company is of the view that credit is eligible under the earlier laws, the same can be shown in ST-3 returns and carried forward to GST regime. If the officer interprets otherwise, he will try to recover and your company can approach the authorities for final view. However, if you fail to mention such credit in ST-3 returns, your company shall permanently forego an opportunity to bring that credit to GST regime even though such credit eligibility issue has been settled in favour of assesses.

     

    Issue 4: Our company has paid service tax under reverse/partial charge mechanism. We are not aware that credit of service tax paid on reverse/partial charge mechanism can be availed and hence missed out in the returns for the period ending Sept 16. Can we take the entire credit pertaining to the period prior to Sept 16 while filing the returns for the period ended March 17?

     

    As per Rule 4(7) of CCR, 2004, the credit can be availed before expiry of one year from the date of documents referred in Rule 9(1), one of which is the challan for reverse/partial charge mechanism instances. Hence, credit pertaining to the period where one year of the challan has not been elapsed can be shown in the returns ending March 17.

     

    Issue 5: We are a company engaged in provision of taxable and exempted services using common and exclusive input services. We have opted for Rule 6(3A) of CCR, 2004 for reversal of common credit pertaining to our operations. As per the said rule, the credit can be provisionally availed and reversal has to be done by 30th June of succeeding year when the actual turnover details are available. If the provisionally availed credit is more than the actual eligible, the said credit has to be reversed. However, if the provisionally availed credit is less than the actual eligible, the said credit can be availed in June. So, for the year 2016-17, the due date is 30th June, 17. Suppose we have ended up taking less credit entire year, in June, we shall be eligible to avail. However, our ST-3 returns for the period ended March 17, shall not have such credit. In such case, how shall the credit be availed in June, 17.

     

    The transitional provisions under model GST law does not cover such a situation. We need to wait till the final law come into public space to guide the credit under such a situation. Alternatively, the assessee can revise his return within the time stipulated under the old laws and accordingly claim refund under Section 185(2) of revised model GST laws.

    Issue 6: We have received an invoice for input service on 31.12.2016. The amount of service tax is Rs 5,00,000/-. We have availed the credit of such service tax in Jan 17 on a premise that we will be paying the vendor within 3 months of the date of invoice. However, we have not paid the vendor by 31.03.2017 and such credit has to be reversed in terms of Rule 4(7) of CCR, 2004. We shall pay the vendor in May 17 and in such a scenario, how can the credit be taken in June 17?

     

    The transitional provisions under first model GST law does not cover such a situation. However, the revised model GST law vide Section 197 allows the credit to be taken if the payment is made within three months from the appointed day. Since the payment is made in May, 2017, the credit can be availed under GST laws.

     

     

    The Bill was introduced to amend the Income-tax Act, 1961 and the Finance Act, 2016. The below are the changes proposed vide the amendment bill:

     

    1. Amendment to provisions of Section 115BBE (W E F 01-04-2017);

     

    1. Proposed to amend the applicable tax rate in relation to income referred to in section 68/69/69A,B,C,D(Undisclosed Income-UI);

     

    1. Voluntary disclosure and Income determined by the AO of UI shall be subject to tax @60%.( Existing position- No Voluntary Disclosure). Surcharge @25%. Effective Rate 77.25% including cess. The payment of tax has to be made before 31st March of the relevant previous year.

     

    1. Amendment to Provisions of Section 271AAB1 :- by insertion of (1A) to the section

     

    Issue

     

    Conditions

     

    Penalty

     

     

     

     

     

    Search Initiated on or after the

    Assessee  admits

    in  a

    30% of UI

    date on which this Bill get the

     

    Statement U/S 132(4) the

     

    assent of the President

     

    UI  and  specifies

    the

     

     

     

    manner in which it was

     

     

     

    derived;

     

     

     

    •   Pays tax and interest on UI

     

     

    •   Furnishes the ROI for the

     

     

     

    specified  Previous

    Year

     

     

     

    declaring UI

     

     

     

     

     

     

     

    Any other case

    Not covered above

     

    60% of UI

     

     

     

     

     

     

    1. New Section 271AAC introduced. This provides for overriding effect of the provisions of the Act except Section 271AAB. It provides for penalty @10% of the tax payable U/S 115BBE (UI). There by effective tax rate including education cess is 83.25%. However, this penalty is not imposed on Voluntary disclosure by the assessee. No Penalty U/S 270A upon the income covered by this section. However, provisions of section 274 and 275 may apply.

     

    1. A new Scheme “ PRADHAN MANTRI GARIB KALYAN YOJANA, 2016 introduced by insertion of new chapter IXA.( After the Chapter for IDS, 2016)
    2. Salient Features of this Scheme:-

       

      ?Anyperson may make a declaration on or after notified date in respect of income in the form of cash or deposit in an account maintained by the person with a specified entity2 chargeable to income tax for any AY commencing on or before 01/04/2017.

       

      ?Nodeduction of expenditure or allowance and set off of any loss shall be allowed against income included in the declaration.

       

      ?SuchIncome shall be chargeable to tax @30%. In addition a new surcharge for the purpose of Union called Pradhan Mantri Garib Kalyan Cess(PMGKC)@33% of such tax.(i.e 30*33.33)

       

      ?Inaddition to tax and surcharge penalty shall be levied @10% of UI. (Effective Rate 49.99% - 30% tax+9.99% surcharge+10% penalty)

       

      ?Notlessthan 25% of the UI shall be deposited in Pradhan Mantri Garib Kalyan Deposit Scheme, 2016(PMGKDS,2016). This amount shall be deposited before filing the declaration.

       

      ?Nointerest will be allowed on the amount of deposit and such deposit shall be allowed to be withdrawn after 4 years from the date of deposit subject to other conditions.

       

      ?Thetax,surcharge and penalty shall be paid before filing the declaration.

       

      ?Declaration shall be verified by the person referred to in section 140 of the Income-Act.

       

      ?Thedeclaration shall be accompanied by the proof of deposit and payment of tax, surcharge and penalty.

       

      ?Theamount of UI shall not be included in the total income of the declarant for any assessment year.

       

      ?Noentitlement to re-open any assessment or reassessment under the Income tax Act or Wealth Tax Act or claim any set-off or relief in any appeal, reference etc in relation to such assessment or reassessment.

       

      ?Theinformation contained in the declaration shall not admissible in evidence against the declarant for the purpose of any proceeding under any Act subject to few exceptions3 . (Immunity from disclosure of the information in the declaration!!)

    Today the scope of compliance is much broader and its impact on business far greater than ever before. Despite greater regulation and the risk of noncompliance, some companies may not be taking their responsibility for identifying and managing compliance risk particularly seriously. Organisations should Identify, prioritize, and assign accountability for managing existing or potential threats related to legal or policy noncompliance—or ethical misconduct—that could lead to fines or penalties, reputational damage, or the inability to operate in key markets.

     

    A survey conducted in 2014 by Compliance week indicates 40 percent of companies did not perform an annual compliance risk assessment. Further a study conducted by IIA indicates 38 percent of chief audit executives (CAEs) did not use compliance or regulatory requirements as a resource to establish the audit plan.

     

    The Three Lines of Defense

     

    The Three Lines of Defense model advocates for clearly defined responsibilities over three aspects of risk: risk ownership, risk monitoring, and risk assurance. Functions that own and manage risks are the first line. Various risk control and compliance functions that monitor risks are the second line. The role of internal audit — the third line of defense — is providing assurance to stakeholders (the board of directors, the audit committee, executives) that compliance risk can be managed at acceptable levels. Finding that “acceptable level” — the balance between the potential cost of risk and the amount of resources to mitigate it — is, of course, part of the challenge.

     

    Role of Internal Audit

     

    Determine and prioritize risks to aid in developing the internal audit plan, helping to provide the board and the executive team with assurances related to risk management efforts and other compliance activities.

    Internal audit engages in two types of audit one that determines if there is appropriate compliance, and one that determines whether there are controls in place to provide reasonable assurance that there is appropriate compliance. Internal audit should focus on the management of compliance risk not an opinion on whether there is compliance. It’s possible for the company to be in compliance one day and not the next. In addition, internal auditors are experts in processes and controls, not necessarily in all the nuances and complexities of laws and regulations. Internal audit’s ability to perform its role can be helped or hindered by the structure in which it functions. The IIA recommends that internal audit report functionally to the board and administratively to the CEO to help protect internal audit’s independence. Financial statement and internal control risks, as well as some operational and compliance risks that are likely to materially impact the performance of the enterprise or financial statements

     

    The Responsibilities of the Board and Audit Committee

     

    vTheboard and the audit committee are key stakeholders in the compliance risk function. While organizations may operate differently, responsibilities of the board should generally include the following:

     

    vObtainassurance that management is handling compliance risk. Ask to be alerted should there be any significant violations of laws and regulations.

     

    vAskquestions of internal audit, management, and the compliance function about the company’s capabilities. Are the right people and the right culture in place? Is there a guarantee that, if problems are identified by employees, they will be reported and action taken? Is there a reasonable level of assurance that the company is compliant with the applicable standards and regulations of its industry?

    vObtaintraining on compliance.

     

    vTheauditcommittee’s compliance risk responsibilities may also vary from one organization to the next, but they should be clearly outlined in the committee’s charter. The audit committee may also ask the internal audit department to audit the second line of defense, focusing on significant strategic risks.

     

    vFurther,the audit committee and the board should thoroughly review and approve internal audit’s plan and ensure it is focused on both appropriate compliance and operational risks, particularly when industry standards may not reflect all the risks to the business.

     

    How to make effective compliance risk assessment

     

    vCollecting inputs from a cross – functional team

    vBuildonwhat has already been done:

    vEstablishclear risk ownership of specific risks and drive toward better transparency:

     

    vMaketheassessment actionable vSolicitexternal input when appropriate vUseplainlanguage that speaks to a general business audience: vPeriodically repeat the risk assessment

    Conclusion

     

    The constantly changing regulatory environment increases the vulnerability of most organizations to compliance risk. This is particularly true for those organizations that operate on a global scale. The complexity of the risk landscape and the penalties for non-compliance make it essential for organizations to conduct thorough assessments of their compliance risk exposure. A good ethics and compliance risk assessment includes both a comprehensive framework and a methodology for evaluating and prioritizing risk. With this information organizations will be able to develop effective mitigation strategies and reduce the likelihood of a major noncompliance event or ethics failure, setting themselves apart in the marketplace from their competitors.

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