By: Robin Banerjee
The CA community is upset, and it is logical – the National Financial Reporting Authority (NFRA) rules have been notified. It has taken away the Institute of Chartered Accountants’ (ICAI’s) monitoring and disciplinary powers over auditors of listed entities and large unlisted companies besides banks and insurance companies.
There are reasons for the CA community to be upset. So far the ICAI was the sole regulator for accountants and auditors. The accounting body lobbied for long against the necessity to have a watchdog, though several government committees have endorsed the need for a separate, independent regulator.
What will NFRA do?
The new accounting regulator will have the power to monitor and enforce compliance of accounting and auditing standards. It’ll oversee the quality of service and undertake investigation of the auditors of listed entities. Also, the unlisted entities with paid-up capital of not less than ₹500 crore or annual turnover of over ₹1,000 crore or those having aggregate loans, debentures or deposits of not less than ₹500 crores.
The rules talk of procedure to be followed for disciplinary proceedings by NFRA. It has mandated 90 days, time-bound disposal of the show cause notice through a summary procedure — faster and more efficient legal procedure, than ordinary methods.
The orders disposing of a show-cause notice will lead to: no action; caution; and action of imposing penalty on auditor or debarring the auditor from engaging in the profession.
However, this time frame looks rather aggressive and optimistic.
The 16 member body (including the NFRA chairman), will mostly consist of non-accountants. It is equivalent to asking the body of doctors to be supervised by engineers!.
The overseeing body (NFRA) has primarily brought into the picture after government was concerned that ICAI was not taking timely disciplinary actions. It sometimes took years. While the 90-day period for deciding on a case seems challenging, yet there is a finite period given for case disposal.
On the other hand, the accountants’ reports and actions are the fulcrum on which corporate governance stands. Thus, lots of decisions are taken based upon accountants’ certifications. So, if there are doubts arising therefrom, it is expected that complains or code of conduct violations are decided upon expeditiously.
Therefore, governance is all about trust, and timeliness of decisions goes a long way to repose confidence.
Should the policemen police themselves? Are there no courts of appeal to raise issues of dissatisfaction over the actions of the guardians of our society?
Same seems to be the case for accountants and auditors.
It seems unfair for the same body of CAs (ICAI), which is carrying out the work of audit, to be disciplined by itself. This is a case to argue as conflict of interest does exist.
Hence, an independent body to adjudicate matters of disciplining the professional auditors seems to be a fair proposition.
Cons for NFRA
However, the new watchdog (NFRA), in its current structure, has plenty of room to improve. The 16 member body (including the NFRA chairman), will mostly consist of non-accountants, especially bureaucrats arbitrating on the specialized work of accountants. It is equivalent to asking the body of doctors to be supervised by engineers! This is a serious issue.
It seems unfair for the same body of CAs (ICAI), which is carrying out the work of audit, to be disciplined by itself. This is a case to argue as conflict of interest does exist..
Certain portions of NFRA reports need to be made public, rather than an internal note. In which case, they should specify reasons for not letting the public know of its findings. Because unless the business community knows what went wrong, how will corrective actions be taken?
Do watchdogs watch?
Yes, they do – so it seems. Global accounting regulators identified serious problems at 40% of the audits they inspected in 2017, raising concerns about the quality of work being carried out by some of the accounting firms. The inspections focused on organisations in riskier or complex situations such as mergers or acquisitions.
The most common issue identified was a failure among auditors to “assess the reasonableness of assumptions”. The second biggest issue was the failure among auditors to “sufficiently test the accuracy and completeness of data or reports produced by management”. And these are no trivial concerns!
Can NFRA be avoided?
The accounting regulator in India, is not the first of its type. There are about fifty countries where such oversight-boards exist, though named differently.
Ability to police how accountants check the books of accounts by an independent body (NFRA), should bolster investor confidence. The whole objective should be to boost India’s reputation for upholding corporate governance standards, which is critical to maintain the country’s attractiveness for doing business.
The die is cast – NFRA is established (though being challenged on its legality). It’ll be foolhardy to keep screaming against it. Discussions with the government should take place to ensure that the rules proclaimed becomes more logical and deliverable.
So, let’s accept the fact that NFRA will henceforth police the Indian auditors.
About the Author: Robin Banerjee is the Managing Director of one of the oldest and largest Polyvinyl chloride (PVC) film manufacturers – Caprihans India Limited. Prior to the present role, he served as the Group Chief Financial Officer of Suzlon Energy, Executive Director at Essar Steel and Thomas Cook.
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