Two Governments, Parliament And An Expert Body - How ICAI Is More Powerful Than All Of Them
It’s been five years since the enactment of the Companies Act, 2013 and only a few sections have yet to be notified. Most notable amongst them is the provision to create a National Financial Reporting Authority - an audit super-regulator of sorts.
The concept was introduced in an an earlier version of the draft law and endorsed by the Standing Committee on Finance - Fifteenth Lok Sabha. In its August 2010 report, the Committee approved the creation of a new body that would not only set and oversee auditing and accounting standards, “but also to monitor the quality of audit undertaken across the corporate sector”.
Since then, it has been endorsed in another Parliamentary Committee report, by a government-appointed company law committee and by the Finance Ministry and Ministry of Corporate Affairs, across two governments. But one body has consistently opposed the creation of the NFRA - The Institute of Chartered Accountants of India. Because the powers of this self-regulatory professional body stand threatened.
First, it suggested the NFRA provision be removed as it may lead to a conflict with the ICAI. That suggestion was rejected by the Parliamentary Committee in 2012. It was also suggested then that matters of professional misconduct committed by a chartered accountant or a CA firm be first referred to the ICAI “which may refer it to NFRA for final action”. In short - ICAI should be retained as regulating authority. That was rejected too.
2013: Law Is Enacted
The bill became law and Section 132 provided for the creation of the NFRA and tasked it with the job of recommending accounting and auditing standards, ensuring compliance with them and overseeing the quality of service of the accounting and audit professions.
The proposed NFRA has been given the power to investigate matters of professional misconduct by chartered accountants or CA firms, impose penalty and debar the CA or firm for up to 10 years.
Importantly, the law states that “no other institute or body shall initiate or continue any proceedings in such matters of misconduct where the National Financial Reporting Authority has initiated an investigation.”
That would end the monopoly of the ICAI on training and qualifying chartered accountants, giving them license to practice and regulating them.
Not too soon some would say. The U.S. ended self-regulation of the accounting profession in 2002, a year after the Enron scam broke and prompted the legislation of the Sarbanes-Oxley Act that ushered in new corporate governance and disclosure requirements.
One of the provisions of the Sarbanes-Oxley Act was to constitute a Public Company Accounting Oversight Board to “to protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports”.
This year the PCAOB will complete 16 years of audit oversight. Meanwhile the ICAI continues to lobby against the NFRA.
2016: More ICAI Lobbying
In 2016, it failed to convince The Companies Law Committee, constituted to propose amendments to the 2013 Act, to consider removing the provision. The ICAI warned against multiple layers of regulation and said accountants see the “constitution of NFRA as an interference in the functioning of the profession”.
The Committee, manned by bureaucrats, corporate experts, a retired judge and then president of ICAI, was not swayed. It insisted that an independent body to oversee the profession is a “requirement of the day”.
Curiously, many of The Company Law Committee’s recommendations were accepted by another committee, the Standing Committee on Finance - Sixteenth Lok Sabha, but not this one.
The Standing Committee report, published in December 2016, devoted 8 pages to discussing the NFRA issue. It started by listing the many arguments put forth by ICAI.
- Multiple regulatory bodies,
- ICAI is a world-class regulator,
- NFRA will be a costly affair (PCAOB’s 2016 budget was $250 million),
- Unavailability of adequate competent personnel.
It quoted the ICAI as saying “...the CA fraternity is in the process of coping with new changes such as penalties, rotation, restricted services, Internal Financial Controls over Financial Reporting and other aspects imposed by the Companies Act. T”
It then noted the lengthy arguments offered by the Ministry of Corporate Affairs to counter ICAI.
- In many countries outside auditors perform the important gatekeeper function.
- The number of independent audit regulators worldwide is up from 18 in 2006 to 51.
- The NITI Aayog, in a separate matter, criticised the self-regulatory structure of such professional bodies.
- An international consultant engaged by SEBI said “the ICAI's oversight is passive in nature and with limited focus on active investigations”.
But the clinching argument made by the MCA is in the numbers it produced regarding ICAI’s disciplinary mechanism.
Of the 1,972 cases taken up by the Disciplinary Committee/Board of Discipline of the ICAI, only in the matter relating to Satyam Computers have the members been permanently removed.
Penalties of one year or more have been imposed on members in only 14 of these cases. In a majority of the cases, the members have been found as not guilty.
Further, in majority of the cases where members have been found guilty, they have been merely reprimanded or cautioned.
Astonishingly, the MCA noted that the ICAI has not moved even on complaints made by the Ministry.
“It may also be pertinent here to draw attention to the reference in November 2015 to ICAI by MCA for examining the role of auditor and possible misconduct on their part in case of 132 listed companies whose scrips were suspended by SEBI for abnormal price rise which was not supported by the fundamentals of the companies, non-existent companies, etc. and ”
Thus, reiterating the need for an independent audit regulator the MCA stated the NFRA would be established by the end of fiscal year 2016-17.
Despite this lengthy, powerful submission by the MCA, the Lok Sabha Committee concluded in its report that the existing mechanism under ICAI should be streamlined and strengthened “without needlessly adding to regulatory levels”.
2018: One More Scam, No NFRA
Such is the power of ICAI’s objections and lobbying that it’s 2018, another corporate scam is dominating the headlines, and there’s no sign of the NFRA yet.
It is nobody’s case that the creation of one more regulator will end scams. But that a professional body can subvert the will of Parliament just to protect its turf is worth noting.
This in a country where the last time Prime Minister Narendra Modi addressed a gathering of chartered accountants he asked “why is it that in the last 11 years, only 25 chartered accountants have been prosecuted. Did only 25 people make a mess?”
Who’s protecting the ICAI?
Menaka Doshi is Managing Editor at BloombergQuint.