Disbanding the auditor club

Updated on: Nov 03, 2013
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The CA Institute’s power to regulate the profession and issue accounting/ auditing standards has been significantly curtailed.

Under the old Companies Act, the National Advisory Committee on Accounting Standards (NACAS) advised the Government in the formulation of accounting standards for companies. The groundwork for drafting, exposing and finalising the standard was done by the Institute of Chartered Accountants of India (ICAI). The panel worked closely with the CA institute and sometimes modified the standards before they were notified. Some of the modifications were significant, such as the amortisation of foreign exchange losses. Other standards, including those related to financial instruments, have not been cleared by the panel even though they were finalised years ago.

Under the new Companies Act 2013, the National Financial Reporting Authority (NFRA) is the advisory and regulatory body. Besides advising on the formulation of accounting and auditing standards, it will monitor and enforce compliance. Thus, unlike NACAS, it will have a monitoring and regulatory role. It will have the power to investigate suo motu , or on reference from the Government, professional or other misconduct by any member or firm of chartered accountants. Also, unlike NACAS, it will advise the Government on auditing standards.

Further, no other institute or body (including ICAI) shall initiate or continue any proceedings where NFRA has initiated an investigation. This is an important change, turning the self-regulated profession of chartered accountancy into a regulated one. The ICAI’s power to regulate the profession and issue accounting/ auditing standards has been significantly curtailed. It will now function more like an accreditation and advisory body. Interestingly, this is a global phenomenon, and the developments in India are neither unusual nor unexpected.

The NFRA will have the powers of a civil court. It has significant discretion in awarding penalty, which may extend up to ten times the fees received and debarment of a firm for up to ten years. Its orders can be appealed before the Income Tax Appellate Authority.

The NFRA will have a chairperson and not more than 15 part-time/ fulltime members. To avoid conflict, the Act specifies that the chairperson and fulltime members shall not be associated with any audit firm, including their consultancy wing, during their appointment and for two years after that. The NFRA will be largely populated from the bureaucracy.

The recently published draft rules further clarify the role of the NFRA. It will have three committees — Committee on Accounting Standards, Committee on Auditing Standards, and Committee on Enforcement. The NFRA and the committees will have members from the ICAI, Ministry of Corporate Affairs, SEBI and RBI, along with other experts. This shows that the committees will co-ordinate across regulators.

It will take over the task of financial statement reviews from the Financial Statements Reporting Review Board of ICAI and the Registrar of Companies; as also the function of the Quality Review Board for audit firms. This is a welcome move to bring diverse activity by various agencies under one roof.

The draft rules state that the NFRA can investigate matters related to companies as well as review auditor/ audit firms. The companies covered are listed companies; unlisted companies with net worth/ paid-up capital not less than Rs 500 crore or annual turnover not less than Rs 1,000 crore; and companies with overseas listing. Additionally, NFRA will undertake peer review/ investigation of auditors: those that audit 200 companies or more in a year; and 20 or more listed companies.

It will have dedicated, qualified and whole-time investigation teams. Minimum qualifications for the inspectors include at least 10 years’ auditing experience and exposure to audit in the relevant industry. Anyone can file a complaint or inform the Enforcement Committee against a company/ auditor. To avert potential misuse, the Enforcement Committee will not entertain anonymous information. It would perhaps be better for the NFRA to focus mainly on major lapses that have a large-scale market impact.

The authority will have a huge agenda in the coming years, including the implementation of IFRS (International Financial Reporting Standards).

The author is a partner in a member firm of Ernst & Young Global

Published on November 03, 2013

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