(This story originally appeared in on Feb 28, 2018)
NEW DELHI: The scam at state-run Punjab National Bank has prompted the government to move on setting up a new agency to regulate and discipline auditors, almost five years after the law provided for it.
Setting up of the National Financial Reporting Authority, a new agency provided for in the Companies Act, will be discussed by the Union cabinet on Wednesday, a move that will take away review and disciplinary functions of the Institute of Chartered Accountants of India (ICAI). The cabinet will discuss a proposal from the ministry of corporate affairs to allow for creation of posts, paving the way for setting up NFRA with a chairman and up to 15 members.
ICAI has been resisting the change as it will be rendered toothless, with education and conducting exams being left as its main role. Several countries have separate agencies to regulate auditors and India had drawn upon their experience. In the US, the task is handled by the Public Company Accounting Oversight Board, while the UK has the Financial Reporting Council.
“There is conflict of interest in the current system, that is why we had thought of separating ICAI’s functions in line with global best practices,” said DK Mittal, a former secretary of the ministry of corporate affairs.
Finance minister Arun Jaitley has made public his displeasure with the failure of auditors to check the fraud at the second largest public sector bank.
On its part, ICAI has maintained that there was no need to whittle down its powers. “As per framework of governance, standard setting and disciplinary mechanism prescribed in the Chartered Accountants Act, 1949, a strong public interest oversight mechanism is inherent in ICAI’s structure since eight members on the central council (apex body) of ICAI are nominated by the government of India. Similarly, each disciplinary committee has two government nominees and each board of discipline has one government nominee and the chairman of appellate authority of disciplinary mechanism is a retired high court judge, nominated by the central government,” the institute had said on Saturday when TOI highlighted how the government had gone slow on setting up NFRA.
The law empowers NFRA to recommend to the government the formulation of accounting and auditing policies and standards, monitor and enforce compliance of the standards and oversee the quality of service of auditors. It will have powers to investigate, impose penalties and even debar CAs and firms from practising for six months to 10 years.
Since last summer, the government has been pushing for a clean-up of the audit profession with Prime Minister Narendra Modi highlighting the poor disciplinary record of CAs on July 1. Modi had said only around 25 auditors had faced action in over a decade and around 1,400 cases were pending, numbers that ICAI had contested. Subsequently, the MCA moved the cabinet for setting up NFRA but a decision was kept pending although the finance ministry also talked about the plan in a press release on crackdown against errant companies, including shell companies.
The PNB scam, where frauds adding up to almost Rs 12,600 crore went undetected for over six years, has spurred the government into reconsidering the move, said sources.