Finance Minister Arun Jaitley’s latest move – to establish National Financial Reporting Authority (NFRA), a body that will regulate the regulators has sparked off a debate on ‘peer review’ among the auditors’ fraternity.
The finger of guilt in corporate misdoing is pointing to auditors, more than ever. No sooner had the ₹12,700-crore fraud involving diamantaire Nirav Modi and the Punjab National Bank come to light, a senior Finance Ministry official wondered why the people at the helm were not questioned, what the auditors were doing. This indicated the thinking within the government.The NFRA has been strongly opposed by the auditing fraternity.
With NFRA set to take off questions are being asked. Has the Finance Minister taken the decision ‘under pressure’ or did circumstances dictate it? What about implementation? How exactly will you ensure that the super-regulator is an independent body?
Is the NFRA superfluous?
According to auditors, the current system has adequate oversight mechanism. Further, it is a misconception that the professional institutes – Institute of Chartered Accountants of India, Institute of Company Secretaries of India and Institute of Cost Accountants of India – are self-regulated. Government nominees on the Board of Discipline and the Disciplinary Committee are keeping watch.
What the government has done seems to be in keeping with international norms and acting on Prime Minister Modi’s call to CAs in July last year, to weed out corrupt practices and persons from their fraternity.
But the question is whether another regulator is necessary when there are independent bodies like the professional institutes. These institutes are governed by an Act of Parliament. There are different levels to enforce these laws – Parliament, Administrative Ministry – Corporate Affairs, and the institutes’ councils.
Who shoulders the blame?
This debate has been raging ever since the Satyam Computers scandal, termed the local Enron, broke and the government tightened its grip on the auditing industry. SEBI’s recent ban on PWC from auditing listed firms for two years has raised the issue of whether the auditing firm or its erring members should bear the brunt. The professional institutes took action against the CAs but not the firms. Many felt this was not punishment enough.
However, the auditing fraternity begs to differ. Amarjit Chopra, Past President of CA Institute and currently Chairman of National Advisory Committee on Accounting Standards (NACAS), says, “The Institute has been taking immediate steps. The delay has not been on the part of the professional body barring one or two years, but due to other external regulatory bodies like RBI and courts.”
Nesar Ahmad, Past President, Institute of Company Secretaries of India, and now actively dealing with insolvency cases, says, “It is all about the timeline. What the government has done is trying to sync with what happens in the US or the UK. But, can the same be applied here?”
NFRA is being established as an independent regulator for the auditing profession. It is one of the key changes brought in by the Companies Act, 2013.
The decision is expected to result in improved foreign/domestic investments, economic growth, help globalise business by meeting international practices, and assist in further development of the auditing profession.
But, the devil is in the detail!
According to the government, the inherent regulatory role of ICAI as provided for in the Chartered Accountants Act, 1949 shall continue in respect of its members in general and specifically with respect to audits pertaining to private limited companies, and public unlisted companies below the threshold limit to be notified in the rules.
The Quality Review Board (QRB) will also continue to audit private limited companies, public unlisted companies below prescribed threshold and also those companies that may be delegated to it by NFRA.
The fear is that the NFRA may become a dwelling for retired bureaucrats. NFRA will have a Chairperson, three full-time members and one Secretary. “I hope the government will ensure it will have enough professionals to take care of disciplinary as well as technical matters and not become a parking lot,” says Chopra.
Certain steps such as rotating the auditors have been taken, but what remains a challenge is implementation. Will all this ensure that there is no promoters’ influence in appointing auditors for their companies, whether in the public or private sector? Will the auditors have a stronger spine and not get influenced by their promoters?