For better books

One of the criticisms of the Companies Act, 1956 was that it was too soft on companies that did not follow its detailed provisions. Multiple amendments were proposed to the Act but none were implemented till 2013. Once the Satyam and Sahara sagas took place, the Companies Act 2013 was implemented more as a reaction to these scams than as a well-thought of piece of legislation.

Over the years, many of these provisions have been diluted through amendments. One of the provisions in the Companies Act that was not implemented was the proposal to set up a National Financial Reporting Authority (NFRA) — an authority to prescribe accounting standards and oversee companies and their auditors. Recently — and as a reaction to L’affaire Punjab National Bank — the Government approved the setting up of NFRA to prescribe accounting standards, oversee listed companies, large companies and their auditors.

NFRA appears to be an amalgamation of two bodies that are already existing and going about their business — the National Advisory Committee of Accounting Standards (NACAS) and the Serious Frauds Investigation Office (SFIO). In effect, the Institute of Chartered Accountants of India (ICAI) has lost its battle against the setting up of NFRA.

The NACAS has done its job of prescribing accounting standards pretty well. Accounting standards for large entities in India are more or less aligned to International Financial Reporting Standards (IFRS). The SFIO has investigated 312 frauds pertaining to the last 13 or so financial years, of which 186 pertain to 2014-2017 and of which 87 pertain to 2016-17. These statistics prove that the pace of investigating frauds is improving year on year. So, the big question is, “Was NFRA really required?”

SFIO states that it is a multi-disciplinary organisation under the Ministry of Corporate Affairs, consisting of experts in accountancy, forensic auditing, law, information technology, investigation, company law, capital market and taxation, for detecting and prosecuting or recommending for prosecution white collar crimes/frauds. Its website does not indicate the recommendation that it has given for the 312 cases that it has investigated but one can assume that some of the prosecutions doled out by SEBI originated with the SFIO. If both SFIO and NFRA exists together, they could be competing to prosecute the same cases. It may only be a matter of time before the SFIO pales into insignificance.

The ICAI has itself to blame for losing its battle against NFRA. Set up by an Act of Parliament, it has played its role of being an educational institution to perfection but it neither had the powers nor showed the intensity to pass prosecutory orders on its members. Its structure of a large Council, multiple committees and bosses with tenures of only a year is obviously not working.

Considering the wealth of financial information on companies in its possession and past cases of misconduct by its members, the ICAI should take this as an opportunity to guide NFRA as it goes about its business. While playing its role as a policing body for accountants, NFRA officials can also enter accountants’ offices and check their records. The ICAI can take this also as an opportunity to educate its members on best-in-class documenting practices. On its part, the NFRA need not commence its work on accounting standards and regulating professionals de novo — it should simply partner with the ICAI for this.

The writer is a chartered accountant

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