Reform in three Acts with long-overdue Bill to improve audit discipline

The government introduces a long-overdue Bill to improve the audit discipline

A Bill to amend the three Acts that regulate the business of Chartered Accountants, Cost and Works Accountants and Company Secretaries was introduced in the last week of the winter session of Parliament by the Ministry of Corporate Affairs. The core of the Bill is about the auditing role of chartered accountants, though it covers much else, too. It was only appropriate that the Bill was referred to the standing committee of finance, and one can be sure the provisions will be heavily contested.

Since the Satyam saga of 2009, whenever the role of auditors was questioned, it primarily revolved around the big four multinational partnerships. Large companies are quite likely to be audited by either PricewaterhouseCoopers, EY, Deloitte or KPMG, and that is why questions rightfully popped up about these large audit firms. But the larger questions about the reforms in the role of the chartered accountants as well as the two sister business professional services was often left dangling.

The Chartered Accountants, the Cost and Works Accountants and the Company Secretaries (Amendment) Bill, 2021, has been written in this context. No surprises, then, that the salient feature of the Bill are the changes envisaged in the disciplinary powers for the three. Under the three Acts that the Bill seeks to amend, the governing council running the affairs of the respective institutes under which all the chartered accountants, cost accountants or company secretaries are registered, used to decide on disciplinary issues, with full rights. The council formed a board of discipline, which would decide all cases of misconduct by a professional. The cases would be framed before it by a disciplinary directorate. While the presiding officer of the board would be a member of the institute and also had the majority membership in it to investigate any charges of misconduct, the directorate was a single-member affair. There would be one member nominated to the board by the Ministry of Corporate Affairs. Cases from the board would travel up to a five-member disciplinary committee of the institute headed by the president of the council. Two of them would be members from the respective professions and two nominated by the Ministry of Corporate Affairs. So, here too, the majority was a foregone conclusion.

All this changes now (see box: Accounting for discipline). The presiding officer of the board must not be a member of the institutes and shall be nominated by the central government. For the first time there is a time bar on how long an inquiry can run. The Bill says an inquiry must be completed within 180 days from the receipt of the preliminary examination report. And the chairmanship of the disciplinary committee shall also be from outside the profession.

These changes are likely to be contested. The changes mean effectively the disciplinary powers of the Institute of Chartered Accountants of India (ICAI) or the other two bodies — Institute of Company Secretaries of India and Institute of Cost Accountants of India —  are whittled down substantially and they become more of an examination conducting body. They are, however, in line with the global norms. The power of the president of the council to arbitrate over the fortunes of the chartered accountancy companies, by deciding whom to hand down harsh or mild penalties, will be over.

Who will be the chairmen of the board of discipline and the disciplinary committee? The Bill says these women or men will be selected by the central government from amidst a panel of suitable people with experience in law, having knowledge of disciplinary matters and the profession. The government members will be selected from a panel of people of eminence with experience in law, economics, business, finance or accountancy.

The key question before the standing committee will be whether a professional from another field can have the ability to adjudicate on an accountancy or audit-related issue. Considering that each regulatory body in sectors ranging from telecom, petroleum and electricity to securities market has a law member, this is a clause in whose favour the ministry should be able to argue effectively.

There is more. While each council satisfied itself with setting up only one board of discipline each year, the Bill now provides for multiple boards. The single board meant a long line of cases would accumulate before it, cutting into the chances of disciplining errant members on time. Moreover, the Preliminary Examination Report to be prepared by the disciplinary directorate at the very first stage has to be categorical whether there is guilt/no guilt in the conduct of the member. It allows for a clearer investigation and does away with a mutual back scratching report. It is a salutary measure that should be made the norm in government vigilance cases also. Often the reports on officers fail to do this due diligence, leading to a pile-up of irrelevant cases that meander for years. 

It is surprising that such a salutary set of measures necessary to improve the scope of corporate governance in India has taken so many decades to come up. The ICAI Act is of 1949 vintage, that of the Institute of Cost and Works Accountants of 1959 and the Company Secretaries Act was passed in 1980. There have been piecemeal changes to them but no efforts to make for a wholesale rewrite, even as the quality of audit has dipped starkly.

For instance, the Bill has mandated there should be an annual audit of the accounts of the councils of the institutes by a firm of chartered accountants to be appointed from the panel of auditors maintained by the Comptroller and Auditor General of India. Clearly, there is much room to improve in the role of the accountants and auditors, if such blindingly obvious measures have not been the norm for these institutes. There is a larger advantage in adopting these measures. In most negotiations on free trade agreements by India, the non-recognition of India’s chartered accountants in mature markets comes up as a major obstacle. Hopefully, the changes proposed now will change their image abroad.