Companies are owned by common shareholders who are entitled to receive profit in return for their investment in the equity. It is for them to decide whether they want to: (a) distribute the entire profit among themselves which is called Dividend, (b) retain the profit for further expansion of Company’s operations, or (c) split profit for both paying out as dividend and retention for further expansion. In each case, the decision is initially taken by the Board of Directors and finally approved by all the shareholders through annual general meeting (AGM). Part of profit retained and paid out is calculated on the basis of retention ratio and pay-out ratio. The decision to pay out dividend is taken when the accounts have been audited, amount of profit firmed up and finally approved by AGM.
Sometimes, it so happens that Companies want to announce dividend in anticipation of finalization of accounts and approval of AGM. In that case, they pay out a portion of anticipated profit which is called Interim Dividend.
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How can common shareholders ensure that profit calculated by the directors is correct and there is no cheating?
ReplyDeleteExternal auditors who have to verify that the accounts are correct are appointed by common shareholders and report to AGM. With auditors appointed by common shareholders, there is hardly any chance of any cheating.
ReplyDeleteVery Correct and one can hope that external auditors are not helping others like they did in the scandal of Enron otherwise its bad news.
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