Erring auditors beware

The Chartered Accountants Act was first passed in 1949. Over the next 72 years, amendments to the Act have been incremental in nature. As the profession evolved, auditing became more complex and it was found that some firms were guilty of doing things they should not be doing. One of the significant shortcomings in the Act was that the Institute of Chartered Accountants of India (ICAI) could take disciplinary action only against individual members and not audit firms.

A Bill introduced in the ongoing session of Parliament attempts to rectify this anomaly by mandating that firms register with the ICAI and disciplinary action can be taken against them too. The Bill proposes more than 40 amendments to the Act but the focus is clearly on disciplinary action.

Power to discipline

Looking at the provisions, there seems to be too much of focus on disciplinary proceedings. Section 21 asks the Council to establish a Disciplinary Directorate, Section 21A wants the Council to set up one or more Boards of Discipline while Section 21B asks the Council to establish Disciplinary Committees.

The Disciplinary Directorate would be staffed by the ICAI while the Boards of Discipline and the Committees would have outside members too. In doing so, the Ministry of Corporate Affairs appears to have whittled down the power of the ICAI to discipline its members. The previous versions of the Disciplinary Committee had a majority of its constituents from the ICAI; the new Bill swaps the equation in favour of outside members.

Even the Section that lists out the functions of the ICAI states that the Institute can remove names from the registers of members and firms and the restoration of the names can be done “subject to the orders of the appropriate authorities under this Act”.

Overall, three committees and a minimum of a dozen members decide disciplinary action to be taken — may be a bit too many considering the fact that auditors are being extra careful these days and one cannot ignore NFRA (National Financial Reporting Authority). Over the last year or so, the ICAI and the NFRA have stepped on each other’s toes on a couple of occasions.

Rule 10(3)(A) of the National Financial Reporting Authority Rules, 2018 makes it clear that the action in respect of cases of professional or other misconduct against auditors of companies shall be initiated by the Authority and no other institute or body shall initiate any proceedings against such auditors.

The Rule goes on to say that that no other institute or body shall initiate or continue any proceedings in such matters of misconduct where the Authority has initiated an investigation under this rule. A subsequent sub-clause clarifies that the ICAI can only investigate cases that are not being investigated by the NFRA.

If the Board of Discipline finds that a member is guilty of professional or other misconduct, it may pass an order reprimanding the member or removing his name for up to six months or impose a fine which may go up to ₹2 lakh. If the Board of Discipline is of the opinion that any such member who is a partner or owner of a firm has been repeatedly found guilty of misconduct during the last five years, they can prohibit the firm from undertaking any activity relating to the profession of a chartered accountant in practice for such period not exceeding one year, or impose a fine which may go up to ₹25 lakh. It would be a brave and reckless member who would repeat his misconduct repeatedly for five years and expose the firm to either a ban or a monetary penalty.

With the risk of disciplinary action looming over auditors and audit firms, insurance companies would be the ones that will benefit the most in the present situation.

The writer is a chartered accountant

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