Multiple corporate scandals, seems to be reflecting the failure of the auditors, which calls for reforming the regulatory structure for the auditing profession.
Notably, there are already plans for annulling the self regulatory role that is currently played by the “Institute of Charted Accountants in India” (ICAI).
What is the envisioned replacement for ICAI?
Several corporate scandals have surfaced in the past, where Charted Accountants had failed in their audit duties.
This was again reiterated in the “Punjab National Bank fraud”, and calls for better regulating the auditing profession has grown stronger.
Notably, replacing the self-regulatory role of “Institute of Charted Accountants of India” (ICAI) with an external regulator is already under consideration.
NFRA - The setting up of an external regulator namely “National Financial Reporting Authority” (NFRA) has been envisaged in the Companies Act 2013.
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.
What has been the record of ICAI?
Overall 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.
Specific Cases - 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.
Structural Flaw - 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.
