‘National Financial Reporting Authority’ (NFRA) was proposed recently as an independent regulator for accounting and auditing professionals.
But the authority is said to also constitute three part-time members from ICAI, which has raised troubling questions about its neutrality.
How did NFRA evolve?
The Beginnings - The NFRA was first proposed as an independent regulator of accounting and auditing in the wake of the Satyam scandal.
As the scam went undetected for many years by the company’s auditors, there are clear indications of auditor collusion in the fiasco.
This created a public outcry for better regulations in the sector and a 2010 standing committee report had subsequently vouched for the creating NFRA.
Stalemate - NFRA was a part of the Companies Act 2013, which was notified in 2017, but interestingly the clause related to NFRA wasn’t notified.
Notably, Institute of Chartered Accountants of India (ICAI), which is currently the certifying and self-regulatory institution, had opposed NFRA.
ICAI had vouched that it is doing a good job and a new regulator isn’t needed as it would merely add regulatory levels.
Significantly, despite the strong support of the ministry of corporate affairs, NFRA couldn’t be notified, which indicates ICAI’s lobbying power.
Revival - The recent Rs. 13,000-crore Punjab National Bank (PNB) fraud that seems to have broken the camel’s back on NFRA issue.
This case slipped through a variety of audits by CAs that public banks are mandated to undergo (statutory, branch, concurrent, and stock audit).
Also, the rising non-performing assets (NPAs) of banks have also raised questions about the failure of auditors to properly review asset quality.
What is the composition of NFRA?
NFRA was touted to be a fully independent body that will consist of a chairperson, three full-time members and nine part-time members.
Among the part-time members, one each from Ministry of Corporate Affairs (MCA), CAG, RBI, and SEBI, will be part of NFRA
Additionally, two external experts (accountancy, auditing, finance, or law) and three ex-officio members from the ICAI (the president, and chairpersons of Accounting, and auditing boards) will also be members in NFRA.
While none of the previous proposal had a provision for ICAI members to be included in the board, the inclusion of the 3 ICAI members is intriguing.
Notably, ICAI members are practicing CAs, which clearly gives rise to a conflict of interest and also will bring the neutrality of NFRA into question.
What is the way forward?
The separation of the regulator from those it regulates is a fundamental principle of good governance and followed universally.
This is true of the Securities Board of India (SEBI), the Telecom Regulatory Authority of India (TRAI), and the Competition Commission of India (CCI).
International Forum of Independent Audit Regulators (IFIAR) also stipulates to keep practicing auditors out of the regulatory mechanisms.
Formal independence of the regulator is necessary to maintain trust and public confidence and this mandates keeping the ICAI away from NFRA.
Importantly - CAs elect members of the ICAI’s council to represent their interests, and not the interests of investors, creditors and other stakeholders.
Allowing ICAI representatives to have a say in the working of the NFRA is like letting the fox guard the hen-house.
