If NFRA spreads its wings too wide its failure may not be ruled out: Amarjit Chopra, Chairman, NACAS
With the economy struck by a series of corporate frauds, the Modi government has approved setting up of National Financial Regulatory Authority (NFRA), an independent regulator for the auditing profession that will replace National Advisory Committee on Accounting Standards (NACAS). The regulator would not be a game changer and may not speed up disciplinary proceedings in a great measure, NACAS Chairman Amarjit Chopra tells ETCFO in an exclusive interview. The former Chairman of the Institute of Chartered Accountants of India (ICAI) also shares a perspective on the priorities and challenges for NFRA. Edited excerpts.
With NFRA a reality now, to what extent it will help solve the issues of the auditing profession?
I do not think it will solve all the problems. NFRA will not be a game-changer. It will be too much to expect that it will be able to speed up disciplinary proceedings by a great measure. The institute (ICAI) could not do much to speed up sensitive cases because the courts kept on giving stays in the past. Even when NFRA proceeds, respondents will go to courts for stay and then it may be too much to expect that it will not be granted by the courts. And if that be so, NFRA will continue to face the same blame. A substantial amount of its time will be consumed in getting the stay vacated as has happened with ICAI in the past and present.
In matters of public interest the courts need to show restraint in granting stays with regard to proceeding with the cases. Of course, once a case is decided, the court may on merit decide about stay on operation of the decision. NFRA may help to some extent on the psychological front. There will certainly be a symbolic change. But with or without NFRA, the country is bound to improve as a whole for various reasons. The corporate system, banking system etc are bound to improve and consequentially the economy. I am a born optimist.
Are you in agreement with the draft rules proposed by the government such as that NFRA can conduct quality review of all listed companies as well as suo motu determine if any investigation has to be undertaken? What are your suggestions?
One has to have clear perspective of the disciplinary mechanism and quality control. In my view, Quality Review Board (QRB) has been doing a reasonable job over the last few years. It is a separate body in which majority of the members are from outside the CA Institute. The ICAI nominates five members out of the total 11. Further, its Chairman is nominated by the government, who is generally a retired bureaucrat. That power for quality control could continue with the QRB and NFRA could simply coordinate with it along with the Institute’s Financial Reporting Review Board (a non-standing committee of the CA Institute that reviews the general purpose financial statements of certain enterprises and auditor’s reports there on)
The only drawback is that as per the law, expenses of the QRB have to be borne by ICAI which undermines its independence from the viewpoint of international practices. But the government could have decided to fund QRB if it wished to make it independent. I believe that for quality control purposes, NFRA should coordinate with the QRB. It may ask QRB to go ahead with whatever is to be done rather than expanding itself too much. But it need not undertake control of all the auditors of listed companies and other specified entities. How much work does NFRA wish to undertake? Even today, QRB, after all the efforts, cannot review quality in more than 70-80 cases. NFRA may leave the work of review of implementation of accounting and auditing standards to QRB and may undertake disciplinary cases wherever the complaints are filed by the government or the regulators. In addition, it may look into the conduct of members in case of reported huge scams. Rest of the disciplinary mechanism must continue with ICAI particularly when there are government nominees on every disciplinary bench and without the presence of at least one government nominee, the quorum is not complete.
It is also important to note that NFRA should not undertake suo motu investigation. This may lead to witch-hunting. I do not wish it to be used for unintended objectives. Qualifications and disqualifications of auditors are laid down by the Companies Act, 2013 and no other Body needs to deal with it. Likewise, with regards to imparting of education and training, the ICAI is doing it with a lot of credit. As NFRA is to replace NACAS it shall be recommending notification of accounting and auditing standards to the government. It would certainly strive for implementation of these standards.
In a nutshell, NFRA’s main role should be on recommending accounting and auditing standards to government, coordinating with QRB and undertaking disciplinary proceedings in cases only based upon the criteria suggested herein above.
What are your views on the composition of NFRA?
As per the draft rules, NFRA will have three representatives from ICAI, namely, President-ICAI, Chairman-Accounting Standards Board, and Chairman-Auditing and Assurance Standards Board. The rest is up to the discretion of the government; it can appoint CAs, non CAs, representative of chambers, etc. (Total members proposed are 15). But if an action has to be taken against an auditor, it is imperative that the conduct should only be gauged by eminent members from the profession having knowledge of accounting and auditing standards. In case they wish to take assistance of experts from other fields, legal, forensic etc, they should be free to do so on consultative basis.
What should be the priorities for NFRA in your view?
The priorities for NFRA should be to ensure that the quality of audit improves by making effective use of QRB for quality review and undertaking disciplinary cases in matters of utmost importance. If it attempts to spread its wings too wide, its failure may not be ruled out.
What should NFRA be alert to?
It should be alert to over-activism and I fear it may happen to begin with. This is because whenever a new body is formed, over-activism becomes a possibility. NFRA needs to be realistic in its targets.
How should ICAI conduct itself post NFRA?
The ICAI has to be vigilant. It should coordinate with banks as well as SEBI and find out the accounts and companies that are sending alarm signals. It can proceed in those cases suo motu and send the message across the fraternity and the community that it means business. The unfortunate part is people expect auditors to detect frauds which is not part of their responsibility either under the Act or under the existing auditing standards.
In fact, ICAI is the only body in this country which has actually been taking action against its own members. I know almost ten cases where members have been debarred for lifetime in the past 15-20 years. The Institute should publicise the action it takes in such kind of cases. The time is ripe for the Institute to show to the world at large that it has been acting against its own members and the delays in all the cases cannot be attributed to it.
The role of the valuers, rating agencies, lawyers and actuaries also needs to be looked in to. Auditors tend to rely upon certain statements, reports or documents produced by these professionals. If these people have been playing the other way around, auditors alone are not to be blamed. The ICAI should tell the government that in such cases these professionals are to be blamed and not our members. It is the time to speak out.
Note: Views expressed by Amarjit Chopra are in his personal capacity and not as Chairman, NACAS