Independence is about being seen to be independent. Mega frauds have made the independence of the audit profession, globally, suspect.
Loot and Scoot actions of several billionaire business barons have raised questions about the integrity of the job of auditing. Many times CAs have become the quarry of disparagers as if auditors were the only folks sleeping at the wheel. Even though a quasi-independent regulator, the Quality Review Board (QRB) exists, India remains the only major economy where CAs are still self-regulated.
Numerous economic offenders and delinquents have accelerated the rankings of ‘Ease of Doing Frauds’ in India. Majority of the scams such as Satyam, Punjab National Bank scandal, Videocon episode, etc. happily lived in ‘undetected zone’ for years together. Many commentators quickly concluded that inability to detect such frauds is an audit failure. This unwelcoming situation led to a substantial public outcry and appeals for a comprehensive refurbishment of the regulation of the auditing profession.
‘New Baby’ arrives
The Union Cabinet on 1 March 2018, approved the creation of a National Financial Reporting Authority (NFRA), a step forward in regulating the financial audit of large companies. The NFRA was first proposed as an independent regulator of accounting and auditing in the wake of the Satyam scandal. There was the suggestion of a supervisory mechanism with a ‘mandate not only to set and oversee accounting and auditing standards but also to monitor the quality of audit undertaken across the corporate sector.’ As a result, the Companies Act 2013 included Section 132 relating to the NFRA.
The Institute of Chartered Accountants of India (ICAI) opposed the creation of the NFRA, tooth and nail. But the Ministry of Corporate Affairs (MCA stood its ground on the need for the NFRA, though it was not set up.
The speech of Prime Minister on 1 July 2017, altered the panorama and hinted at CAs’ nexus with money laundering and tax evasion and underscored the ICAI’s poor record of disciplining its members. The Rs.13,000 crore Punjab National Bank scam created an environment socially and politically for the government that setting up of the NFRA could not be deferred further.
Most of the major economies of the world have autonomous audit regulators and over the last decade or so, umbrella bodies have come up that have provided an element of solidity to these regulators.
The baby was in a hurry to be born
NFRA was being considered for some time, but it was scurried in the wake of bank scandals. The question here is, would NFRA recover the money? If not, why not restructure the contemporary system rather than crafting another layer of red tape? This will definitely spoil the essence of ‘ease of doing business.’ There are millions of business persons putting their most exceptional efforts for the growth of the country. All of them are not dishonest and deceitful.
Beforehand, many institutions were formed. Setting up of the Serious Fraud Investigation Office (SFIO) due to the Enron scam is a good example. Since March 2007, SFIO has inquired less than 100 cases and submitted less than 20 reports! The output will be zero if NFRA is an attempt to copy the Public Company Accounting Oversight Board (PCAOB). After Enron scam, the US tossed the Sarbanes-Oxley Act, which created PCAOB.
Formation of NFRA and sharing regulatory powers with ICAI will just create a mess and open another window to conceal frauds. For now, ICAI deals with professional misconducts considering various boundaries. But under NFRA, parameters would be amended from case to case, and maybe it just ends up being another governmental table for fraud cover-up. It will be like authorising the fox to guard the henhouse.
Baby will be safe, if….
The ICAI and the NFRA need to join forces towards a common intention of augmenting audit quality. This will, in turn, lead to better financial reporting. The expectations from the profession are higher than any time before. Auditors vouch for the integrity of a company’s numbers and they are critical to the functioning of the market and the economy. The NFRA should aim at boosting the reputation of the audit profession and the value from an audit. It should focus its efforts not on standards setting (where it should rely entirely on the ICAI) but on oversight over larger audit firms that audit public interest entities. It should bring to the table a sense of eliminating bad auditors and spread faith among the people that the profession is not grossly bad as perceived.
Disciplinary cases in respect of listed entities and unlisted entities above a threshold limit would be dealt with by the NFRA; all other circumstances would be dealt with by the ICAI. For the NFRA to be effective, the threshold limit has to be pragmatic and sensible.
The NFRA should have experts in accounting, auditing, and the disciplinary mechanism. It should also look at company secretaries who are currently governed by the Institute of Company Secretaries of India (ICSI) as they have an equally vital role to play in examining rule-compliance. In the long term, if NFRA can work like an Institution such as say SEBI, the long-term effects are going to be extremely good. It should also help in the globalisation of businesses thereby generate more demand and scope for chartered accountants.
Hope the NFRA will perform judiciously and make India’s plan of having an ‘Independent’ Audit Regulator utilitarian. Effective external monitoring is expected to improve the audit quality due to better compliance with auditing standards. But, if NFRA
ends up like the rest of regulators in India, then not much is going to change. However, it’s time to watch the cops of auditors and keep the fingers crossed because Abhi toh party shuru hui hain… (now that the party has just started).
