(Falling) Accounting Standards in India
India is no stranger to multi crore corporate scams and the chaos that ensues. The Satyam Scam, which primarily happened right under the nose of their ‘independent auditors’ affiliated to PWC, a multi-national professional service network is alarming to say the least. The scam happened not only because of the actions of the top management of Satyam Computer Services, but also due to the inaction of the very professionals ordained to ensure that all standards of accounting and auditing are complied with.
Auditing is the examination or inspection of various books of accounts by an auditor followed by physical checking of inventory to make sure that all departments are following documented system of recording transactions. It is done to ascertain the accuracy of financial statements provided by the organization.[if !supportFootnotes][endif] Generally, it can either be done internally or through an independent body. However, Indian law mandates (among other types of audits) a Statutory Audit as per Chapter-X of the Companies Act, 2013[if !supportFootnotes].
Chartered Accountants- governed by The Institute of Chartered Accountants of India (ICAI), which regulates the profession of accountancy in India- give advice, audit accounts and provide trustworthy information about financial records. They are the government’s first line of defense for ensuring elimination of fraudulent and erroneous reporting of accounts in a company’s balance sheet. This is important because in the absence of a credible system, a lot of the privileges of Limited Liability Corporations can be misused by individuals. Furthermore, fraudulent business practices can cause losses to creditors and shareholders. However, the past few years have begun to point out some gaping holes in the system.
This is primarily the reason for the composition of The National Financial Reporting Authority (NFRA) - originally introduced by the Companies Act, 2013. According to the Act, the NFRA will be responsible for:
1.Making recommendations to the Central Government on the formulation of accounting and auditing policies; standards for adoption by companies or class of companies or their auditors;
2. Monitoring and enforcing the compliance with accounting standards and auditing standards;
3. Overseeing the quality of service of the professionals associated with ensuring compliance with such standards, and suggesting measures required for improvement in quality of service.
Effectively, the jurisdiction of NFRA for investigation of Chartered Accountants and their firms would extend to listed companies and large unlisted public companies. As per the draft National Financial Reporting Authority rules, unlisted companies with net worth not less than Rs.500 crores or paid-up capital not less than Rs.500 crores or annual turnover not less than Rs.1,000 crores as on 31st March of immediately preceding financial year and companies having securities listed outside India will be under the jurisdiction of NFRA.
Nirav Modi and Mehul Choksi. Source: Businessline 2018.
The biggest advantage that the NFRA will have over the ICAI is the power to punish even firms in case of frauds. ICAI currently can punish only individuals and cannot determine the liability of an auditing firm as a whole. Mr. Arun Jaitley, India’s Finance Minister, has stressed the importance of an independent body for regulation of auditors and its impact on foreign and domestic trade relations. This may also help improving the ICAI’s relationship with the International Forum of Independent Audit Regulators (IFIAR) since India is the only country with an association that educates, appoints and regulates CA practitioners under the same umbrella organization.
ICAI, which has famed itself for being the only regulating auditing standards and antecedent matters will take a hit. It is effectively left with the management of audits pertaining to private limited companies, and public unlisted companies below the threshold limit. As per the proposed NFRA Rules, the Quality Review Board can, in certain situations delegate the audit of these companies to the NFRA, reducing the autonomy of the ICAI even more. Further, since both the bodies have the mandate to formulate the policies and standards for accounting and auditing, there may be a situation where there is a conflict between the two, also increasing the duplicity of effort on both parts.
However, like most of the welfare plans by the Modi-era government, plans which seem inclusive on the face of it are usually not. The composition of the proposed NFRA- a Chairperson, three full-time members and nine part-time members- is not all that independent. The three full time members will be from the ICAI, which is interesting, especially after the PM’s speech on Chartered Accountants’ Day on July 1, 2017 where he pointed out the obvious role of a Chartered Accountant in money-laundering and tax evasion. Ironically, the need for an independent regulator arose because of the misgivings and the obvious bias within CA community. Including members from that very community in its regulator seems rather redundant.
The question here is not whether we need another body for a job that the ICAI has already been performing, but whether the new body, or even the old one would be able to do the work it has been assigned, independently and effectively. It would not be wrong to say that India’s image cannot stomach another scam of the scale of Satyam Technologies. The Modis and Choksi have already spooked the financial climate enough in the past few months and it is imperative that the government is seen to be acting in a direction that guarantees independence, integrity and effective regulation of the Accounting profession in India. Sadly, the NFRA seems to be one step forward, two steps back.
About The Author
Sanya Khurana is a student of law at the IP University, Delhi, India. Sanya is also pursuing her Company Secretary course and is an avid follower of International Relations, in addition to being an established participant and organizer of Model United Nations Conferences at the national and international level.