Is NFRA treading on ICAI’s toes?

It definitely makes for news when two audit regulators — the Institute of Chartered Accountants of India and National Financial Reporting Authority — have a public spat. Recently, it came out in the open that the CA Institute had outrightly rejected the TAC (Technical Advisory Committee) report based on which the NFRA had put out a consultation paper, ‘Enhancing engagement with stakeholders’, seeking comments.

On the face of it, NFRA has done no wrong. It has done what it is legally mandated to do. So, is it a case of ‘crying wolf’ or is the CA Institute justified in its stand vis-à-vis the report? What is the clash about?

Legally speaking, the NFRA is not a super regulator, but it does have some powers which are beyond what the ICAI has. The bone of contention is that the CA Institute feels that there is a terrain breach by NFRA — for instance, its attempt at looking at disciplinary matters.

In a terse letter on the NFRA consultation paper, CA Institute President Nihar N Jambusariya conveyed that ICAI was “outright rejecting” the report and expressed serious concern over the “one sided surrealism” of the report. He further argued that the paper’s fallacious circular argument analogies, references and hence inferences made were far from the ground reality in many matters.

The Institute wanted the TAC report scrapped, saying it was based on the views of a miniscule set of stakeholders who responded to a questionnaire. The report has to be re-drafted based on the views of a large sample set of stakeholders, it said.

And if the CA Institute was expecting a response from the NFRA, none came by. It is an open secret that from the initial days of talk of NFRA’s birth, word goes that the ICAI has been opposed to the concept and the consultation paper this time became only a trigger for the public spat.

Some of those who are closely associated with the profession feel that the provocation could be because the report is not very kind to the community and sees the entire profession through the same lens. “Not every auditor is compromised, so certain elements in the report could have resulted in such a response from the CA Institute,” said a professional.

But, there are those who feel that the Institute is behaving like a spoiled child who has been reprimanded for eating too many sugar candies.

From the start, the ICAI has been opposed to NFRA.

What is NFRA?

Section 132 of the Companies Act envisages constitution of NFRA for the purpose of matters relating to accounting and auditing standards. NFRA will make recommendations to the Central Government on the formulation and laying down of accounting standards and auditing policies for adoption by companies or class of companies or their auditors, as the case may be.

It will also help in monitoring and enforcing the compliance of the accounting and auditing standards as well as oversee the quality of the service of the professions associated with ensuring compliance.

The Act further envisages that NFRA will have the power to investigate, either suo moto or on a reference made to it by the government, for such class of bodies corporate or persons, in such manner as may be prescribed into the matters of professional or other misconduct committed by any member or firm of chartered accountants, registered under the Chartered Accountants Act, 1949, provided that no other institute or body shall initiate or continue any proceedings in such matters of misconduct where the NFRA has initiated an investigation under this section.

It has also been empowered with debarring a firm or a member if found guilty.

And this is where things seem to have gone wrong. Instances have shown that self-regulation is not the best way to regulate indiscipline or misconduct. According to some, being a member-driven organisation, there is always scope of getting influenced.

Pavan Kumar Vijay, Past President of the Institute of Company Secretaries of India, minces no words when he says, “Professional bodies should not judge their own case and therefore to maintain discipline an independent body needs to look into it.”

So where is the turf war here?

None, if one goes by what has been said by the policymakers. On March 16, 2020, to a question from Shashi Tharoor in Lok Sabha on whether the creation of NFRA in October 2018 has resulted in presence of two similar accounting regulatory bodies in India, the then Minister of State for Finance and Corporate Affairs, Anurag Singh Thakur, had said “NFRA and ICAI are not two similar accounting regulatory bodies. The respective roles and areas of functioning of the NFRA and ICAI are different…”

He had also stressed that there is no conflict between the jurisdictions of the ICAI under the Chartered Accountants Act, 1949 and NFRA under the Companies Act, 2013 as their functions and jurisdiction are distinct.

The design of NFRA is very clear and, therefore, little scope for conflict. Then why the controversy is the question?

Engagement is basic and here it seems NFRA did not connect with the profession before coming out with the paper. It also needs to be clarified whether it is about inspection or is it investigation if one is talking about disciplinary action.

It is difficult to find a remedy in situations like this. But, to begin with, the two can sit across the table and start things with a positive approach and maturity, if the intent is to bring the profession up the curve. Both the entities need to focus more on improving the audit quality rather than policing them.

The lesson for policymakers is that having sectoral regulators is the best approach, but may not work if there are multiple regulators overseeing the same activity. Therefore, when making the regulations it is important to study the long-term impact of the decision.