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Monday, Mar 11, 2002

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Time to regulate auditing profession?

Shaji Vikraman

LAST week, the Government issued directions to the Securities and Exchange Board of India (SEBI) to achieve its objective, perhaps for the second or third time in the decade-old existence of the capital market regulator.

Exercising the powers to issue directions under Section 16 of the SEBI Act, the Government asked SEBI to direct stock exchanges not to allow any violation of the listing agreement by corporates. Within a day of SEBI carrying out this directive, corporate India was desperately cancelling interim dividends, as fast as it had declared the pay-outs in the first place.

The basic objective of stopping many promoters from walking away with hefty dividend income minus the dividend tax was thus achieved, after much kicking and screaming by corporate India's high profile lobbying arms. The whining act by private corporates may now be on display in another segment, which in the view of the Finance Ministry needs to be tightly regulated. More precisely, the auditing profession.

In early February, shortly after the scandal relating to Arthur Andersen, the accounting firm of Enron the Finance Ministry forwarded a note to the Department of Company Affairs (DCA). The note made out a strong case for an independent regulator to rein in accountants in India.

The Government's view was that experience had shown that the self-regulatory status for chartered and cost accountants granted to them through statutes had not worked out well. North Block has indicated to the DCA that the time was opportune to carry out changes in the statute to regulate the auditing profession.

The model that is being talked of is quite similar to the one which the Securities Exchange Commission (SEC) in the US has flagged off. The idea is to have a regulator or a public oversight body for the profession, the majority of whose members would be from outside the ranks of auditors. So would be the Chairman.

In the US, the Chairman of the SEC, Mr. Harvey Pitt, has proposed a private accountants oversight group that would supervise audit reviews and discipline accountants for incompetence and ethics violations. The plans call for a majority of the board to be made of public members and for the group to be funded by the private sector outside the accounting industry.

The plan has been supported there by the highly-respected former SEC Chairman, Mr. Arthur Levitt, who has suggested that all the board members should be drawn from the public sector. Changing auditors every seven years and forcing audit firms to separate their auditing and consulting business also form part of the recipe to tighten regulation.

With the Finance Ministry having flagged off the issue, the call has to be taken by the DCA. Putting in place a regulatory framework may not be easy given the clout of the profession, and the backing the professional bodies may get in Parliament where some of its members are prominent and vocal.

This is just one of the fall-outs of the collapse of Enron in the US, now being felt in India also. Just a couple of days ago, the US President, Mr George Bush, announced a plan to crack down on corporate executives who mislead their shareholders. CEOs there will now be held accountable for the accuracy of their financial and disclosures each quarter.

Public disclosure of transactions in company stocks by directors and top company officials in two business days, and a plan to forfeit the bonuses and other compensation for any accounting related violations have also been mooted.

For corporate India whose ethical practices were on display shortly after the Budget, the adoption of these plans in the US could be a little unsettling. For, pressure will then follow to straighten them here also.

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