The 2002 Enron Scam in the US has brought stringent self-regulation of Sarbanes-Oxley Act and a new regime of corporate governance and disclosure requirements in Accounting and Auditing. In India, the Satyam Scam has resulted in floating NFRA. The much-awaited regulator, the National Financial Reporting Authority, was announced on March 1 and draft rules were notified on March 21.

It was a matter of debate during the setting up of a professional body of Chartered Accountants (CAs). Should the government or the Institute of Chartered Accountants of India (ICAI) have the power? The power was vested with ICAI to investigate CAs and was retained when ICAI Act was amended in 2006. The 2009 Satyam Scam shook the nation and has left a scar on the professional body. A committee was constituted to suggest on revamping provisions of the Companies Act. In Companies Act, 2013, a separate provision has been provided to notify the separate regulator to regulate CAs.

Prime Minister Narendra Modi’s speech on CA Day — July 1 — sent strong words on how some CAs were involved in tax evasion, money laundering and apathy in handling the disciplinary matters of its members. Though there was praise for ICAI’s role in “nation building” and continuous education, training, interaction with government and in conducting examinations etc.

Surfacing of fraud cases — Punjab National Bank (PNB) to the tune of around Rs 13,000 crore, Rotomac Global Rs 3,695 crore, Jatin Mehta Rs 6,200 crore — have necessitated a regulatory body. As per Cibil, wilful defaults are estimated to be at Rs 1,11,738 crore from 9,339 borrowers. Squandering of public money became an easy source. On PNB fraud, Finance Minister Arun Jaitley asked: “There are internal auditors and external auditors. What have they been doing?”

The NFRA has been asked to investigate CAs or a firm or LLP who audit — Listed Companies, Unlisted companies with a net worth not less than Rs 500 crore or paid-up capital of not less than Rs 500 crore or annual turnover not less than Rs 1,000 crore as on March 31 of immediately preceding financial year, and companies having securities listed outside India. The Centre further has the power to refer the entities for investigation where public interest would be involved. The rest are regulated by ICAI.
Thereby, auditors are not audited by auditors but by a regulator.

The ICAI Council is a body elected by the members to investigate a member who may have jeopardised the interests of the stakeholders. Secondly, there has been a considerable delay in disposing of cases relating to auditors. The concern is that despite different audits conducted in a bank, such as internal audit, concurrent audit, stock audit, inspection audit and statutory audit, not detecting frauds is a matter of concern. Besides, quality review on non-performing assets of banks ultimately resulting as bad loan is a greater concern.

The Niti Aayog, Sebi and MCA have strongly recommended for setting up of a separate regulator (NFRA) which would strengthen the independence of an audit firm, quality of audit and public confidence in financial disclosures. Though a strong recommendation, it was the standing committee that suggested streamlining and strengthening ICAI Act without needlessly adding to regulatory levels so that adequate transparency can be ensured. However, the spate of scams has made NFRA a necessity.

Functions of NFRA include recommendations to the central government on formulation, laying down of accounting and auditing policies and standards for adoption by companies or their auditors, monitor and enforce compliance, oversee quality of service of professionals and have power to investigate, either suo motu or on a reference made to it by the central government, for specified class of bodies corporate or persons, into matters of professional or other misconduct committed by any member or firm of CAs and impose penalty and removal of the CA or firm for 10 years.

Section 132 of the Companies Act, 2013, provides scope for an NFRA. The NFRA shall consist of a chairperson, who shall be a person of eminence with expertise in auditing, accounting and finance or law to be appointed by the central government and such other members not exceeding 15, consisting of part-time, full-time members. The part-time members will represent MCA, CAG, RBI and Sebi. It also includes three members from ICAI. A search-cum-selection committee, chaired by the cabinet secretary, would recommend names for appointments of chairperson and full-time members.

A question arises on the inclusion of an ICAI official, whether he would breach the independent objective of the NFRA? Many international organisations such as the International Forum of Independent Audit Regulator (IFIAR) has membership confined to the governing body who should be non-practitioners. The US Public Company Accounting Oversight Board does not have members to regulate them. Nevertheless, the specialised knowledge of audit and accounting and contribution in this field certainly benefits NFRA. The second proviso to Section 132 clearly needs a declaration to the central government in the prescribed form regarding no conflict of interest or lack of independence exists in respect of his or her appointment.

Multiple scams have eroded the public confidence. Not detecting frauds through audit is a concern. There is a need to build systems without exceptions. Role of different audits have to be expanded and quality of audit and timely action to address the issues swiftly will ameliorate public confidence and restore trust.

Deregulation in the interest of ensuring the quality of audit, fixing accountability and independence in working will have a far-reaching effect. An alternate regulator to regulate in respect of accounting, auditing, quality of audits and to investigate members or firms or LLPs is the need.

The important task ahead of NFRA is to rebuild public confidence and swiftly punish those who perpetrate fraud, bring transparent systems and an early warning system when there is a rot. Then, the NFRA is a boon to the stakeholders. The political system is most crucial for its success.

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(The writer is a chartered accountant)