Why Overhaul Institute of Chartered Accountants of India is the need of hour

Previous experience shows that the process of implementing changes in the control profession was cumbersome and fraught with political economy

Following the report of the Standing Committee on Finance, the Lok Sabha adopted the Chartered Accountants, the Cost and Works Accountants and the Company Secretaries (Amendment) Bill, 2021. According to Finance Minister Nirmala Sitharaman, India will now have an accounting firm equivalent to is to the top companies of the world, and the proposed changes in laws that will regulate chartered accountancy, cost accounting and business secretary that ‘facilitated’.

The amending law, which sought to reform the functioning of three professional institutions – Institute of Chartered Accountants of India (ICAI), Institute of Business Secretaries of India (ICSI) and Institute of Cost and Management Accounts of India (ICoAI) – was last referred years after the Standing Committee on Control.

Why Overhaul Institute of Chartered Accountants of India is the need of hour

Union Minister of Finance Nirmala Sitharaman. Twitter / @FinMinIndia

This article briefly highlights the challenges of the self-regulatory model in the Court of Auditors and why the bill needs to be amended in its current context.

Role of professionals

Professionals such as chartered accountants, company secretaries and cost work accountants help in solving agency problems. They are expected to provide reliable financial information and control business management in companies. For example, stakeholders of a publicly held company such as shareholders, investors and tax authorities rely on the audited financial statements. Serious concerns arise when the auditor’s independence is compromised. Ultimately, this has a negative impact on the market economy.

In this chain of events, the role of professional institutes, such as ICAI, which regulates chartered accountants, plays an enormous role. In view of the global tendency to tackle the problem of growing conflicts of interest, particularly in the field of auditing, several countries have re-examined the existing regulatory approach.

While the proposed amendments to the bill apply to all three professional institutions (ICAI, ICSI and ICoAI), there has been a growing demand over the years from various quarters (such as supervisors, civil society) to reviewing the functioning of ICAI. Conclusions can be drawn from the recent recommendations of the Central Vigilance Commission to carry out a special CAG inspection by ICAI to look into the alleged irregularities.

History of professional institutes

India has a long history of legal professional institutions that are models on self-regulatory principles. Immediately after independence, the Chartered Accountants Act was enacted in 1949, establishing ICAI as a legal body. By drawing inspiration from the mandate of the Institute of Chartered Accountants of Wales and England, ICAI gained the authority to regulate and develop the profession of Chartered Accountancy in India. After a period of ten years, the Cost and Works Accountant Act was passed to regulate the profession of cost accountants. And in 1980, the Business Secretaries Act was introduced.

In a self-regulatory organization (SRO), members of the profession undertake to be a guarantee for the competence and behavior of their members. Members establish and control professional standards, set standards for entry and continuing education, and perform disciplinary actions. Under the self-regulatory model, rules are drawn up by the market practitioners / participants with their expert knowledge. Furthermore, the administrative costs of regulation are borne by the professional members, which reduces the regulatory costs such as inspection and enforcement by the government.

Problems with SROs

SROs may claim that their interests are in line with the public interest, but in practice it may be different. In the past, the Committee of Experts for the Regulation of Accounting Offices appointed by the Ministry of Business Affairs has stated that when professional bodies regulate their professions themselves, conflicts of interest can arise. On the one hand, they must regulate and discipline their colleagues of the profession in order to protect the public interest, and on the other hand, promote their profession in order to compete with other professions. Furthermore, actions taken against the professional members may not correspond to the crimes.

At the global level, with the increasing financial inequality and failure of corporate governance, several countries shifted to independent auditing supervision. To begin with the debacle of Enron In 2001, following the global economic crisis of 2008, the audit profession came under intense scrutiny. Since then, many of the developed economies have recognized the shortcomings of the self-regulatory structure (ineffectiveness of the disciplinary mechanism) in the control profession and switched to independent supervisory bodies. For example, the US created the Public Companies Oversight Accounting Board, the United Kingdom established the Financial Reporting Council, while the Far East established the Certified Public Accountants and Auditing Oversight Board in Japan. Under the new regime, the mandate of regulating the auditors of publicly listed companies shifted from the SROs to the independent oversight bodies, while the regulation of auditors of private companies continued with the SROs.

Problems with ICAI

India was not left untouched by the worldwide scandals. De Enron Scandal sparked debate over the need for an independent control regulator. In 2002, a High Level Committee on Corporate Audit and Management was convened under the chairmanship of Naresh Chandra, which assessed the need to have India’s independent independent oversight body similar to PCAOB in the US. But ICAI objected and the idea of ​​an Indian version of PCAOB was dropped. Some cosmetic amendments were made to the functioning of the ICAI. For example, under the Chartered Accountants Act, a Quality Assessment Board has been created to conduct peer review of audit firms. Likewise, a board of discipline and a disciplinary committee were formed within all three professional institutions – ICAI, ICSI and ICWAI. Although none of these changes could bring about a visible shift in the regulation of the audit profession.

Of course, in 2009 the Satyam scam shook the Indian market, which not only raised questions about the regulatory effectiveness of ICAI, but rekindled the debate to move towards a PCAOB-like structure. Not surprisingly, over the years, ICAI has vehemently opposed the need for a regulator. However, in 2018, nine years after the Satyam The scandal, India’s first independent control regulator, National Financial Reporting Authority (NFRA) was founded. India hereby upgrades the regulatory regime of public company auditors in line with international best practices.

However, the internal functioning (such as conflict of interest in disciplinary mechanism) of the professional institutes, in particular the ICAI, remained. For example, in 2017, the Prime Minister, speaking with the chartered accountants on the founding day of ICAI, expressed serious concerns about the effectiveness of ICAI’s disciplinary mechanism. In 2017, the government convened a High Level Committee chaired by Meenakshi Dutta Ghosh to review the workings of the institutes. The recommendations of this committee formed the basis of the amendment bill.

Why is the amendment bill necessary?

The objective behind the amendment bill, 2021, could generally be divided into three bins, i.e., firstimprove institutional autonomy, runner upstreamline disciplinary proceedings (such as timely handling of cases, creation of multiple boards to hear disciplinary proceedings, make more information available on disciplinary proceedings) and third but most importantly, reduce conflict of interest in the decision-making process. To illustrate, one of the strong reasons for the conflict of interest is related to the appointment and re-appointment of officers as part of the disciplinary procedures. Under the new regime, the board of the institute will no longer have the prerogative in this process, and prior approval by the government would be required for the appointment, reappointment or removal of the director (disciplinary) and the joint director (disciplinary) . Although appropriate caution should be exercised to ensure that there are no executive delays and approval is not in political influence.

Likewise, the role of councilors in the disciplinary proceedings has always been a dispute. The bill ensures that the disciplinary committee of the professional institutions will have a majority of members who do not belong to the profession, including the chairman. This would be a major shift from the historical position where the President or Vice-President of the Council is the President, who teaches the separation of executive and quasi-judicial function, Like, to prevent administrative conflict of interest, the bill proposes the President of the Council to be separated from the progress. Bringing these changes can align the professional institutes in India with worldwide practices.

In line with its previous position, ICAI has raised concerns about the changes that are diluting the role of the council in disciplinary proceedings and dismissing the president from the executive role. Fortunately, the Standing Committee on Finance did not accept the objections and approved the bill in its original form and content. Interestingly, the Standing Committee of its own power has challenged the legal monopoly of ICAI and recommended multiple agencies (Indian Institutes of Accounting) to abide by the rules of IITs and IIMs for providing education and licensing. While the Amendment Bill does not have this provision, this could be a golden opportunity to push this necessary reform to bring competition and transparency into the Chamber.

Another important proposal is being made to address the long-standing ICAI demand to bring companies within their regulatory requirements. This lack of legal power had become a point of contention in the Satyam case, when ICAI punishes the individual members of the auditor but could not further oppose the company.

Summary

The self-regulatory structure in India, where state capacity is limited, serves an essential purpose. However, in the absence of necessary checks and balances, this model can become counterproductive. The bill for amendment aims to achieve this balance. Previous experience shows that the process of implementing changes in the control profession was cumbersome and burdened with political economy. As these reforms are long overdue and necessary, the Amendment Act must be introduced at the earliest.

The author is a Public Policy Advisor at NCAER, a Delhi-based think tank. Express views are personal.

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