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Last Updated : Jan 09, 2019 09:06 PM IST | Source: Moneycontrol.com

Podcast | Digging Deeper: Does NFRA signal the death of ICAI as we know it?

This death(?) of ICAI as we know it constitutes the topic of discussion on this episode of Digging Deeper with Moneycontrol.

Moneycontrol Contributor @moneycontrolcom

Most of us know chartered accountants as the guys who help us do our taxes - by “do,” I mean pay as little as possible of course. If we just paid the amount the government demanded in taxes, would we even require CAs?

ICAI - the Institute of Chartered Accountants of India - is a statutory body that regulates Chartered Accountancy in India. Founded two years after independence, this institute falls under the administrative control of the Ministry of Corporate Affairs of the central government. Its official website claims it is the second largest professional body of CAs in the world.

Anyway, the ICAI’s reputation is a bit tarnished these days. Why? Because the perception is that not enough has been done to rein in errant CAs whose actions have given the entire field a bad name. Matters deteriorated to the point that Prime Minister Narendra Modi took them to task in 2017.

Speaking at the ICAI’s foundation-day even on July 1, 2017 (the ICAI was founded on July 1, 1949), Modi said, “CA is an arrangement in which the human resource development is done only by you. The curriculum is made by you only; you conduct the exam; rules and regulations are also made by you, and your institute only punishes the culprits.

Now the question arises that the temple of democracy i.e. the Parliament of India, which is the voice of 125 crore countrymen, has given you so much authority, then why is it that in the last 11 years, only 25 charted accountants have been prosecuted? Did only 25 people make a mess? And I have heard that more than 1,400 cases are still pending for many years now. A single case takes years to settle…”

You know when Modi says sava-sau-karod-deshvaasi that he’s got a point he wants to make stridently. But what did the CAs do to earn the PM’s wrath? Modi’s dressing down of the institute was followed by two developments that The Economic Times claims will mark the end of the ICAI as we know it. This death(?) of ICAI as we know it constitutes the topic of discussion on this edition of Digging Deeper with Moneycontrol

Here’s how The Economic Times described the developments:

“An expert panel report, which not only voted for an independent regulator but also wanted to introduce competition in the institute’s non-regulatory functions, was released in late October 2017. This was followed by the notification of rules for the National Financial Reporting Authority (or NFRA) in November 2018. These ended ICAI’s oversight on auditors of listed entities and large unlisted companies. Under the new rules, the NFRA will have the power to monitor the auditors of listed entities, unlisted entities with paid-up capital of not less than Rs 500 crore or annual turnover of over Rs 1,000 crore or those having aggregate loans, debentures or deposits of not less than Rs 500 crore as on March 31 of the preceding financial year.”

The top brass of ICAI was taken aback - they went into a huddle and ‘hectic parleys’ were reportedly underway with the institute’s bosses at the Ministry of Corporate Affairs, and the developments apparently drew ‘strong remarks from various stakeholders.’ An ICAI council member told Economic Times that the present arrangement had government representation and was working well.

But it didn’t take long for matters to veer towards now-familiar accusations of overreach, if not outright evil conspiracy. One member who chose to remain anonymous said, “Like the way they want to take control of the RBI, they now want to take over CAs. If we would have been an ordinary association, it would have been a different situation. Any institution, which is established through an Act of Parliament, cannot be killed. You can regulate them, but you should not kill.”

He also disapproved of the NFRA, which will be headed by a non-CA. He explained, “We are against the constitution of the NFRA itself. People who will now chair the NFRA are not experts in accounting or auditing. Right now, there is a retired IAS officer who will be the in-charge.”

Retired IAS officer in-charge? Sounds familiar?

What did ICAI do wrong?

However much the ICAI may try to disparage the NFRA, it only ends up looking like it is desperately trying to deflect attention from its own fall from grace. Self-inflicted fall, as many have pointed out. Here’s why.

As mentioned earlier, the ICAI was formed by an Act of Parliament in 1949. Over the years, the institute became synonymous with the profession of accountancy and audit. It wore multiple hats - an industry association, an educational body, and a regulatory and disciplinary authority.

For example: I am certain that you all have that one friend who is working his backside off trying to pass what we call in common parlance, the CA exam - otherwise known as the CPT or Common Proficiency Test. After that comes the 3-year Articleship where our friends sacrifice all sleep for the aforementioned three-year-period. After that, they move to the Middle East and make tons of money, while we no longer smirk at them. It’s the hard-fought good life, if you will. So how did they go and mess it all up?

Somewhere along the way, the lines between the various roles of the ICAI became blurred. That led to discontent not only among CAs but also across the wider community. The Economic Times reported that as per the latest annual report, the ICAI has a membership of 2,70,305 members. 88,722 of them are fellow members (i.e., more than five years in the profession). In addition to such members, the institute works with a large number of students - between 2,00,000 and 3,00,000 at any given point in time.

In FY17, ICAI had 2,18,319 registered students across various stages. The disciplinary function of the institute involves a two-tier mechanism - a board of discipline, and a disciplinary committee that looks into specific types of misconduct. The law lists various types of offences that qualify as misconduct. The First Schedule deals with misconduct by practising CAs, while the Second Schedule deals with those related to CAs in service. First Schedule offences are overseen by the board of discipline.

The disciplinary committee, on the other hand, has a broader mandate. But what has proven frustrating over the years is the repeated back and forth between the committee/board and the council. The maximum punishment is striking off a member from the members’ register for five years. If the council thinks the person has to be restrained for a longer period, it has to refer the matter to a high court.

But why has this bunch of number crunchers come into focus now? Well, because 2018 was annus horribilis for India’s money managers. It’s a phrase we have come to be all too familiar with in the past year – it was a horrible year. And the mess that was the 13,400-crore PNB scandal brought all financial frauds into sharp focus. So much so that financial fraud has now become a political issue. The Prime Minister’s talk of being a chowkidaar means that he will be judged on this particular parameter. Meaning it will increasingly be under the spotlight.

ICAI has taken some heat for its soft approach towards its accused CAs. The newspaper DNA reported that an official of Ministry of Corporate Affairs said, “ICAI has almost failed to take any disciplinary action against accused CAs who are involved in fraudulent activities and bypassed auditing rules. These will now come under NFRA.”

The Economic Times examined the reasons for the ICAI’s downfall. Its analysis said the ICAI has often spoken about “keeping in view the changing times in terms of advancement of technology enabling faster communication” and e-hearings, but it was trapped in its own labyrinthine processes. It also started taking approvals of the Ministry (of Corporate Affairs) and the parliament. Consequently, says ET, justice was often delayed, and, at times, even denied.

Unsurprisingly, its annual report mentions the prime minister’s presence at its 2017 foundation-day celebrations but avoids all references to his message we mentioned at the start of this podcast.

On one occasion, an affected investor had moved the high court to force the ICAI to take action against an erring auditor. The investor said,  “...(the) CA institute is yet to take disciplinary action against auditors”. In 2015, a Business Standard report spoke about a case against the auditor of the now defunct Global Trust Bank that had dragged on for over 10 years.

According to Mint, data obtained from ICAI on action against auditors for various misdemeanours showed that out of the 1,972 disciplinary cases taken up by the institute, only in the matter of Satyam Computer Services Ltd was the member permanently removed. In six other cases, members were merely reprimanded. Penalties of one year or more have been imposed on members in only 14 of these cases.

In the majority of the cases where members were found guilty, they were merely reprimanded or cautioned. As many as 1,226 cases were closed at the prima facie stage by the disciplinary committee. 117 of those cases were referred by various government agencies and regulators: 49 of them were referred by the corporate affairs ministry and the markets regulator.

In all these cases, the auditors were found to be not guilty. In November 2015, the Ministry had referred cases of 132 listed companies for examining the role of auditor and possible misconduct. These companies were suspended by Sebi for price manipulation. According to MCA, preliminary action was not initiated by the ICAI ‘despite several reminders’.

Daksha Baxi, executive director of law firm Khaitan & Co, told Mint, “We have seen several instances where though the companies or banks have been regularly audited, and the auditors did not detect the wrongdoings in the finances of these entities, which they should have, if they followed the auditing standards. It would seem that an independent body was needed to ensure independence of auditors.”

Pavan K Vijay, former president of the ICAI, says, “The issue with the institutes was the disciplinary process. The institutes are governed by an elected council. Elected members refrained from taking action against people who voted for them. If the council is divided, then there is no action. If one group within the council is stronger, then disproportionate action is taken against another group. Thus, the system has become so dirty — on the one hand there is inaction, and on the other there is vindictiveness.”

And that is cue for the NFRA to step in.

 

What is NFRA?

In the wake of the Satyam Computer scandal, the Companies Act of 2013 provided for an independent regulatory body in the form of the NFRA. The ICAI has been less than enthused by the NFRA right from its inception. The continued opposition to the establishment of the NFRA has delayed its implementation. Though the act was enacted in August 2013, the establishing of the NFRA was notified only in March last year!

Let’s take a minute here to understand the NFRA. The central cabinet approved the creation of a National Financial Reporting Authority -NFRA- in March 2018. It was deemed a major step forward in the regulation of the financial audit of large companies. The NFRA will serve as an independent regulator overseeing the auditing profession, somewhat akin to SEBI for the stock markets.

The Cabinet also approved the creation of the posts within the regulator — that of a chairman, three full-time members, and one secretary. Former bureaucrat R Sridharan was named the first chairperson of the NFRA.

The formal description of the NFRA, as we said earlier, goes something like this: It will have the power to monitor and enforce compliance with accounting standards and auditing standards, oversee the quality of service and undertake investigation of the auditors of listed entities; unlisted entities with paid-up capital of not less than Rs 500 crore or annual turnover of over Rs 1,000 crore or those having aggregate loans, debentures or deposits of not less than Rs 500 crore as of March 31 of the preceding financial year.

What will the NFRA actually do? It will maintain details of particulars of auditors appointed by companies; recommend accounting and auditing standards for approval by the Central government; monitor and enforce compliance with accounting standards and auditing standards. It will also oversee the quality of service of the professions associated with ensuring compliance with such standards and suggest measures for improvement in quality of service.

The NFRA can investigate professional matters or misconduct of any member or a firm of chartered accountants; it can issue summons and examine on oath; it can also inspect any book, registers and documents of any professional/firms probed; it may impose penalties and even powers to debar a member of a firm.

The establishment of the NFRA means that CAs will now be supervised or audited - policing the police, if you will. Every auditor will file I-T returns with the Authority on or before April 30 of every year. Understandably, ICAI, which has functioned pretty much unfettered for nearly 70 years, is resisting this step.

Business Standard reported last October that while NFRA would look into cases of listed companies, the ICAI’s role would be confined to private limited or unlisted public companies below a predefined threshold. The ICAI will also remain an institution that will give away certificates to accounting professionals.

Ashok Haldia, former Secretary of ICAI, believes NFRA has some very tough days ahead. He told the newspaper The Hindu Business Line, “...NFRA has an uphill task...creating a structure and processes for effectively delivering on the complete range of functions — standards setting, professional development, quality monitoring and disciplining of medium and large-size audit firms...Disposal of disciplinary cases in 90 days, and that too, through summary proceedings, is going to be onerous and challenging.”

In late October, a committee of experts appointed by the MCA as per the instructions of the Supreme Court, supported the strengthening of the NFRA and suggested that competition be introduced to the educational and development functions of the ICAI.

Other major economies of the world, after experiencing corporate scandals and accounting frauds, put in place independent regulatory mechanisms. In the US, the Public Company Accounting Oversight Board (PCAOB) functions as an independent audit regulator overseeing the audits of public companies.

The famous Securities Exchange Commission (SEC) is the oversight authority of the PCAOB and can take action against an auditor for professional misconduct or violation of securities laws. The PCAOB sets standards for auditing, quality control, ethics, and independence. It is further vested with investigative and disciplinary powers and can also revoke registration and impose monetary penalties on auditors.

The UK has a two-tier structure, which has an independent audit regulator, the Financial Reporting Council (FRC), and multiple SROs. The critical regulatory activities concerning auditors of public-interest entities are vested with the FRC, while other tasks have been delegated to multiple SROs.

China regulates auditing through three authorities — the finance ministry, the China Security Regulatory Commission (CSRC), and the Chinese Institute of Certified Public Accountants (CICPA).

S Ravi, a senior chartered accountant and a director on several companies, told ET, “The government’s initiative of establishing the NFRA in line with global best practices of regulating professionals and (establishing a) better governance structure is a bold step. It is imperative that apart from the CA fraternity, other professionals and their bodies, who contribute their services towards certifying financial, cost, and compliance records of corporates, be also brought into the regulatory ambit for better governance and uniformity.”

 

What now?

J.N. Gupta, MD and co-founder at proxy advisory firm Stakeholder Empowerment Services, said, “While NFRA should have come sooner, the body should also look at company secretaries who are currently governed by Institute of Company Secretaries of India (ICSI) as they have an equally important role to play in examining rule compliance.”

Narayanaswamy, professor of finance and control at the Indian Institute of Management, Bangalore, said, Self-regulation has in-built conflict of interest. Members or their elected representatives should not be expected to take action against themselves. It is a bit like asking students to grade their own homework. The ICAI’s loss of ‘self-regulatory’ powers have resulted from years of apathy in taking action against the black sheep in its flock.”

He added, “For the NFRA to be effective, it should consist of independent experts with an impeccable record of integrity. Persons elected to ICAI’s council should be kept out...The NFRA should keep its distance from the ICAI. Otherwise, it will be yet another case of regulatory capture.”

 
First Published on Jan 9, 2019 09:06 pm
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