Watchdog for accountants

Independent and robust regulation of auditors a must

Prime Minister Narendra Modi has been particularly keen on curbing corruption and the black economy and almost all his speeches have stressed on the big and small changes needed to make India less corrupt. Much attention has been focused on the financial rectitude of businesses in India. The goods and services tax regime, notwithstanding its inefficient avatar, is expected to bring about transparency in financial transactions. In this regard, reports suggesting that the Centre is likely to institute a new independent regulator – the National Financial Reporting Authority (NFRA) – to monitor the conduct of chartered accountants in the country is a welcome move because it plugs a long-pending structural gap in financial reporting.

As of now, it is incumbent on the Institute of Chartered Accounts for India (ICAI), the professional association of chartered accountants, to self-regulate. However, the institute has been found wanting in acting against its errant members on many occasions, a fact highlighted by Mr Modi himself. Speaking at the ICAI Foundation Day, he told chartered accountants that their signatures were more powerful than that of the prime minister and urged them to introspect and improve their standards. The PM also highlighted the ICAI’s embarrassing disciplinary record wherein only 25 errant auditors had been prosecuted over the past 11 years, and 1,400 cases were pending. 

By instituting a separate body to enforce discipline, the government will be removing a clear conflict of interest. The demand for the NFRA is not a new one. In fact, the Companies Act of 2013 already provides for such a regulatory body. However, the rules for the relevant section of the Act have still not been notified due to reported hard lobbying by chartered accountants. Indeed, even in the previous version of the Companies Act (of 1956) there were provisions for prescribing the accounting standards to be followed by the ICAI. The proposed NFRA could have as many as 15 members charged with regulating the profession. The growing discontent with accounting standards and the government’s relentless push to attack tax evaders seem to have tilted the scales in favour of the NFRA. 

Accounting professionals serve multiple objectives. On the one hand, they serve the businesses that employ them but, on the other, they also serve investors and the larger public interest. The credibility of accounting professionals is a critical component of market functioning. This is not an aspect that can be left without robust regulation. The ICAI’s poor regulatory record, in fact, serves as an argument against self-regulation. Not only is the prosecution rate too low, the whole process drags on for years with thousands of pending cases with the ICAI. As the government goes about outlining such a regulator, it should consider the ample lessons available from across the world. While the NFRA should have adequate powers to enforce compliance of accounting standards and punish violations, the idea should not be to go in for witch-hunting.  In time, policymakers will have to look at ensuring that there is adequate competition in this profession, which is otherwise dominated by a handful of big firms that have not exactly covered themselves with glory.