India’s Plan Of Having An ‘Independent’ Audit Regulator Hits A Speedbreaker
Parliament's desire to constitute an independent audit super-regulator has been thwarted by the professional body of chartered accountants in India. The provision in law continues to remain in limbo. Enacted, but not notified.
Touting it as a victory for the Institute of Chartered Accountants of India (ICAI), its president Nilesh Vikamsey welcomed the recommendation of the Parliamentary Standing Committee on Finance that has suggested a rethink of the National Financial Reporting Authority (NFRA). Vikamsey spoke to BloombergQuint on the sidelines of ICAI Members' Meet in Mumbai last week.
The Birth Of NFRA
Currently, the ICAI is tasked with regulating the accounting profession and formulating accounting standards.
In 2012, the Parliamentary Standing Committee on Finance had identified the need for a quasi-regulatory body for supervising the quality of audit. It had suggested that the National Advisory Committee on Accounting and Auditing Standards (NACAAS) should be renamed as NFRA. And that its brief should include setting accounting and auditing standards, monitoring and enforcing their compliance and overseeing the accounting profession.
The Companies Act, 2013 includes this brief in the form of Section 132; only, it hasn't been notified as yet.
The Rethink Backstory
Of the 1,972 cases taken up by ICAI's Disciplinary Committee, only in one the members have been permanently removed.
In majority of the cases, members have been found not guilty.
Where guilt has been established, in most cases, members have been merely reprimanded or cautioned.
1,226 cases were closed at prima facie stage.
The Companies Law Committee stated these statistics to emphasise that the self-regulatory mechanism of ICAI has inherent weaknesses as far as disciplining and enforcement is concerned. This committee was constituted in June 2015 to examine and make recommendations on issues arising in the implementation of the Companies Act, 2013. Its recommendations found their way into the Companies (Amendment) Bill 2016.
The Ministry of Corporate Affairs had concurred with this view in its submissions to the Standing Committee on Finance
But the present Standing Committee disagreed and has suggested that the decision to constitute the NFRA should be reconsidered.
Consistent with its position on strengthening the oversight of corporateaudit, the Committee desire(s) that the existing mechanism in this regard under theICAI Act should be streamlined and strengthened without needlessly adding toregulatory levels. This may be undertaken in consultations with the Institute ofChartered Accountants of India (ICAI), which is the designated elected self-regulatory body for professional audit in the country.The Companies (Amendment) Bill 2016, Report of the Standing Committee on Finance
ICAI vs NFRA Debate: What Has Changed?
Vikamsey said that he is happy that the Standing Committee has accepted ICAI's view.
We were able to successfully convince the (Parliamentary) Committee that ICAI is not a self-regulatory body. Two out of five members in its Disciplinary Committee are government nominees. In the Quality Review Board, there are six government nominees and the chairman is appointed by the government. The Standing Committee has agreed with our view that there is no need of an overlapping regulator and if at all there is any weakness, ICAI should be strengthened.Nilesh Shivji Vikamsey, President, ICAI
When asked that the concerns around self-regulation have been much debated and what has changed now, Vikamsey said that earlier the merits of continuing with the ICAI as the regulatory authority weren't recognised.
Nothing has changed, Amarjit Chopra, former ICAI president, told BloombergQuint in a phone interview. Veerappa Moily was the one to introduce the Companies Act, 2013 and he is the chairperson on the Standing Committee on Finance, Chopra said. While Chopra lauded ICAI's efforts in disciplining its members, he conceded that India needs a separate audit regulator.
There are cases where we have debarred members for lifetime. Medical Council doesn't debar its members. Has the Bar (Council of India) debarred any of its lawyers? Not even the Institute of Company Secretaries has done it. ICAI is the only institute which is acting against its own members. But yes, worldwide, regulators are separate.Amarjit Chopra, Former President, ICAI
For instance, the Public Companies Accounting Oversight Board in the U.S. and the Financial Reporting Council in the U.K.
Experts BloombergQuint spoke with said that the constitution of the NFRA could've got India a seat at the table of the International Forum of Independent Audit Regulators that currently doesn't recognise the oversight structure of auditors within ICAI as independent. With this suggestion by the Standing Committee, they said, the chair has been pulled further back.
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