India needs an independent audit regulator

Context:

  • Role of audit failure in recent scams exposes chinks in ICAI’s armour; adopting global best practices can help all stakeholders.
  • Notably, there are already plans for annulling the self regulatory role that is currently played by the “Institute of Charted Accountants in India” (ICAI).  

Replacement of ICAI:

  • The inclusion of an independent audit regulator, National Financial Reporting Authority (NFRA), in the Companies Act, 2013 despite all the opposition, was in itself a significant step at the time.
  • While NFRA hasn’t been notified yet, it is being touted as a powerful body that will lay down accounting and auditing standards to be followed in India.
  • It is also envisioned to monitor and enforce adoption of the stated auditing standards, and oversee the quality of the auditing profession.
  • Importantly, it will also have the powers to investigate the misconduct by chartered accountants, either on its own or based on a reference made to it.
  • Consequently, NFRA is intended to become the regulatory body that will comprehensively replace ICAI’s self regulatory role.
  • Resultantly, ICAI will become merely an examining and certifying body.

NFRA’s extensive powers:

  • NFRA’s extensive powers in terms of its ability to investigate, impose penalty and banning operations of auditors and audit firms have been the mainstay of most conversations around the topic.
  • However, this is not the only objective of setting up an independent audit regulator.
  • The overarching objective is to enhance audit quality which, in turn, will enhance investor protection and public interest.
  • The Government and those involved in the process of defining the role of NFRA need to provide enough and equal attention to the other objectives, such as setting standards, monitoring compliance and, most importantly, suggesting measures for improvement in quality of audits.

ICAI’s Past Record:

  • ICAI has for long been serving the individual self interests of its top brass rather than the collective image of the auditing profession.
  • It has long been ignoring the blows dealt to its reputation by fellow member’s lapses and even downplayed them in the face of public anger.
  • Notably, 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 alleged that ICAI hasn’t cared to investigate the role of auditors in suspected stock price manipulation.
  • Notably, SEBI had referred multiple cases to ICAI as early as 2015, for which action hasn’t been taken. 
  • Also, Serious Fraud Investigation Office (SFIO) had referred 34 chartered accountants for suspected involvement in money laundering.  
  • In this reference too, there has been minimal action, with investigations commencing only against 5 auditors.
  • The PNB fraud was indeed the pinnacle of failure as it got through multiple parallel audits like – the branch audit and statutory audit.
  • Self Regulation is a concept where the regulated elect the regulator that governs the entire setup.
  • This model works well only if there is a sense a collective accountability in sector, which clearly seems missing here.
  • Hence, the current state of affairs was completely crafted by ICAI’s own making, which hence justifies calls for an external regulator.

International Arena:

  • Adopting global best practices can help all stakeholders.
  • Almost all major economies today have independent audit regulators, with the most prominent ones being set up between 2000 and 2005.
  • The Public Company Accounting Oversight Board (PCAOB) in the US is one of the earliest regulators, set up as a result of the Sarbanes-Oxley Act of 2002.
  • To share knowledge and experiences, the International Forum of Independent Audit Regulators (IFIAR) was set up in 2006. Today, IFIAR has 52 independent audit regulators worldwide.

India’s Status:

  • In India, discussions on setting up an independent oversight body had commenced almost a decade ago, however it is only now that it is finally close to being implemented.
  • The arguments against setting up such a body have always primarily centred around the fact that the Institute of Chartered Accountants of India (ICAI) has sufficient safeguards to ensure that the process does not result in self-regulation, particularly with the Quality Review Board coming into existence, and
  • lack of awareness regarding the extent of responsibilities of an auditor among non-auditors.

The Difficulties:

  • Most independent audit regulators have been set up on the back of audit failures, inadequate reporting and recognising the inherent weaknesses in self-regulation.
  • What works to our advantage is that there is enough experience and knowledge across countries in setting up such a body. Their best practices can be used by NFRA and that will be instrumental in ensuring a robust, world-class oversight mechanism.

The Need of the hour:

  • The Government and those involved in the process of defining the role of NFRA need to provide enough and equal attention to the other objectives, such as setting standards, monitoring compliance and, most importantly, suggesting measures for improvement in quality of audits.
  • While we have witnessed penalisation of auditors (life time debarring) as well as audit firms (ban from undertaking specific work), we are yet to see any regulator in India prescribing remedial measures.
  • The PCAOB inspections result in not only finding deficiencies but also enforcing remedial measures to help audit firms in addressing quality control issues.
  • Given the ambitious target of setting up large audit firms with global standards, bringing in this approach of positive support from the regulator in addressing deficiencies will be key to the success of NFRA.

Source:Businessline

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