No more self-regulation

It is said that the 12,700-crore PNB scam could have been detected much earlier if governments would not have succumbed to the pressure of chartered accountants (CAs). Prima facie, this could be a plausible explanation for suspending a particular provision of the Companies Act, 2013, that pertained to the formation of an independent regulator for professionals certifying books and accounts of companies. 

Why does India allow merely self-regulation of auditors despite alarming number of accounting scams? Major economies such as the US and the UK have already created independent accounting regulators. India is, however, relying on auditors' self-regulation through their own body — the Institute of Chartered Accountants of India (ICAI). 

It is not that the country did not learn from the Satyam scam. It did frame a new legislation to regulate companies and passed the Companies Act on August 29, 2013, after several rounds of discussions with various stakeholders. Apparently, some of these “stakeholders” persuaded the government to withhold Section 132 of the Act that could have established an independent regulator by curtailing powers of the ICAI. 

Proverbial incompetency

The inefficiency of the CA club is best explained by Prime Minister Narendra Modi in his address at the ICAI foundation day eight months ago: “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., 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 charteredd accountants have been prosecuted. Did only 25 people make a mess?”

On that day, i.e., July 1 last year, PM Modi had made it very clear that the ICAI was unable to rein in its members and some of them were helping rogue businessmen to rob the country.  “CA brothers, a person or a client pays taxes only when the environment around him is conducive which motivates him to pay the taxes honestly. If he sees that the adviser (CA) himself is asking him to hide the truth then he will boldly traverse the wrong path. Thus, it is equally important to identify such wrong advisers and take strict actions against them,” PM Modi was candid that day.

Delayed response 

The PM’s speech in July had made it amply clear that he was more than convinced about the incompetence of the ICAI in penalising its dishonest members. It is, therefore, intriguing that he let off the ICAI with only a warning. What made him wait until this month? The Cabinet, under his chairmanship, approved the proposal to establish an independent regulator for the auditing profession — the National Financial Reporting Authority (NFRA) — on March 1, 2018. A government spokesperson said the need for establishing NFRA was felt “in the wake of accounting scams, to establish independent regulators, independent from those it regulates.” 

It was a delayed response to financial frauds, but better late than never. The country finally got what was absolutely necessary. It, however, lost about five years, including one crucial year under the Manmohan Singh regime. 

Lobbyists at work

Sources in the government and industry suggest that the lobbyists left no stone unturned to keep the Section 132 (establishment of an independent regulator for CAs) under suspension and stall any move of the government to create the NFRA. This also exhibits a lack of conviction or moral weakness of the Minister of Corporate Affairs (MCA). The person in position under the UPA regime should also be held guilty. 

The ICAI has been vehemently opposing the idea of an independent regulator. According to reports by the Standing Committee, the ICAI argued that the creation of an independent regulator was nothing but “duplication of efforts” wherein costs were higher than benefits. It said that the NFRA would result in two regulatory bodies governing the same audit profession. The bulky self-governing body even questioned the government's decision to curb the powers of the ICAI, which was also created by an Act of Parliament. 

In a letter to the parliamentary panel in August 2015, the ICAI had said that “the chartered accountants profession sees constitution of the NFRA as an interference in the functioning of the profession” and pressed for the omission of “the Section 132”. 

The panel, however, strongly favoured the creation of an independent regulator in place of self-regulation by the CAs. It compared the ICAI with the Medical Council of India (MCI), another corrupt self-regulatory body of medical professionals. Discouraging regulation of a profession by elected regulators like the MCI, the NITI Aayog had said that the process was flawed: “It creates an ab-initio conflict of interest and therefore, this system must be discarded in favour of one based on search and selection. Regulators of highest standards of professional integrity and excellence must be appointed through an independent and a transparent selection process by a broad based search-cum-selection committee.”

Rogue accountants

So powerful was the lobby of the CAs that the government and other regulatory agencies could not take any action against erring members of the ICAI. For instance, the ICAI did not act on complaints forwarded by the government in November 2015 indicting auditors of 132 listed companies whose scrips were suspended by the market regulator, the Securities and Exchange Board of India (Sebi). Similarly, the ICAI did not act against 34 chartered accountants, who had worked as mediators in money laundering with the help of a group of companies. Their details were provided to the body by the Special Investigating Team on the black money in April 2016. 

There are several such accounts where the CAs looked the other way and took their right of self-regulation for granted. 

A feeble shot 

Although the CA-corporate nexus has been an open secret, the government only acted after losing Rs 12,700-crore to Nirav Modi. The decision of having an independent regulator for the CAs is on the lines of the global trend. But there are some practical issues that need to be resolved before enacting the NFRA. According to a recent cabinet decision, the new regulator would be empowered to investigate the CAs and their firms of listed and “large” unlisted companies. The prescribed threshold is Rs 100 crore. The ICAI will continue to enjoy its power with respect to audits pertaining to “private limited companies” and “public unlisted companies below the threshold limit”. According to sources, the limit is expected to be around Rs 100 crore. This escape route would, however, be misused by rogue industrialists and the CAs. They can create several shell companies or subsidiaries below the threshold limit and escape the scrutiny of the NFRA. Instead of the dual authority, the government should take away the ICAI's regulatory powers and ask the body to focus on matters related to education and certification of the CAs.

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SELF-REGULATION TO INDEPENDENT REGULATOR 

Institute of Chartered Accountants of India (ICAI)

• Established by the Chartered Accountants Act, 1949
• Has been sole regulator of chartered accountants 
• Governed by a council with 32 members elected by CAs
• Government nominates 8 members in the council

Proposed National Financial Reporting Authority (NFRA)

• Recommend accounting/auditing policies/standards to government 
• Monitor and enforce accounting/auditing standards
• Also has suo motu powers to investigate 
• Covers listed companies and large unlisted public companies