Minding the watchdog

The chartered accountants’ fraternity has weathered many a corporate scandal in the past where its members have been caught sleeping in their watchdog role, without suffering serious damage . Its luck, however, may be running out now. Post the Punjab National Bank fraud, there are grave questions being raised over the role of auditors and the quality of the attest function they perform. The Centre is considering setting up the National Financial Reporting Authority (NFRA) as envisaged in the Companies Act 2013. The NFRA, as conceived in Section 132 of the Act which is yet to be notified, is a powerful body that will lay down accounting and auditing standards to be followed in the country, monitor and enforce their adoption, and oversee the quality of the auditing profession. Importantly, it will have the powers to investigate, suo motu or on a reference made to it, of misconduct by chartered accountants. In short, the NFRA will be a super-regulator that will take over the regulatory functions of the Institute of Chartered Accountants of India (ICAI). The ICAI will be reduced merely to the role of an examining and certifying body from its present status as a self-regulatory organisation.

Not surprisingly, the ICAI is opposed to the idea but if the NFRA does become a reality, and the considered assessment is that it should, the ICAI and the chartered accountants’ fraternity have only themselves to blame. For too long have they been a cosy club of professionals that looked out for each other at the cost of their collective image. They chose to ignore the blows dealt to their reputation by fellow members’ transgressions and downplayed them in the face of public anger. As per government data, of the 1,972 disciplinary cases considered by the ICAI till now, only the auditors of Satyam have been permanently disqualified from membership; in a majority of cases where members have been found guilty, they’ve been merely reprimanded.

Stock market regulator SEBI has also been pushing for NFRA following the inaction of the ICAI in investigating the role of auditors of a set of 132 listed companies where the regulator suspected price manipulation. SEBI had referred these cases to ICAI in November 2015. In another instance, the Serious Fraud Investigation Office had referred to the ICAI the names of 34 chartered accountants suspected of involvement in money laundering — the ICAI acted on only five of them. The PNB fraud is, of course, the last straw. It is inconceivable how such a fraud can happen in a bank which is subject to concurrent audit, branch audit and statutory audit. The ICAI cannot escape the issue by saying that conclusions should await the completion of investigations. There is an inherent problem with the self-regulatory model where the regulated elect the regulators. In the context of today’s world, that model has failed. We need an external regulator for the auditing profession. It is time for the NFRA.

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