Shelve self-regulation

Written by SL Rao | Updated: Nov 28 2013, 11:13am hrs
According to a recent news report the Institute of Cost Accountants is outraged by the new draft rules of the Ministry of Corporate Affairs that will substantially reduce the number of companies that have to be compulsorily cost-audited. Having seen many of these mandatory cost-audit reports, I am satisfied that they serve no purpose in any enterprise that is managed for optimum efficiency or profit. For those that are not managed well, the cost-audit report offers little insight to help them change. What the mandatory cost-audit does is to give easy employment to many hundreds of cost accounting firms.

Such bodies recognised by government statutes (chartered accountants, company secretaries, architects and medical practitioners) are supposed to be self-regulated. Self-regulation must identify malpractices, investigate complaints, and take tough action, including disbarment of those guilty of malpractice. However, there have been very few instances of such investigations and actions by statutory bodies. In the case of the corporate, there have been many instances when an audit report that gives a clean chit is followed by public disclosures of fraud or other acts that should have been detected by one or the other statutory body.

Satyam, National Spot Exchange Ltd, Deccan Chronicle, Kingfisher are only a few such problem-companies. Many companies that have misled the banks and the public had been given good reports by statutory bodies.

All statutory bodies have regulatory powers given to them by government over the practitioners that they have licensed after education, training and examinations. Self-regulation has not prevented scams caused by carelessness or fraud by the licensed practitioners. What is worse is that in India, the rules allow penalties only on individual members, not on the firm which employs them to give professional expertise.

American medical practitioners fear lawsuits by patients and their relatives for malpractice. Damage payments and the insurance premiums to pay them are high. This makes medical care costs very high in the US. Apart from the courts, the professional medical association hears such complaints and takes stern action. Lawyers are another self-regulated group. American lawyers are hauled up for malpractice and other lawyers give evidence against them, as they do in other professions. Such is the case with other statutorily-recognised associations like certified public accountants. American professionals are willing to testify against fellow-professionals.

This is not the case in India. There are practically no instances in India of professionals having been hauled up and punished, or having given testimony in courts against fellow professionals. The statutory bodies regulate entry into the profession, set the rules and standards for the profession, conduct the examinations to admit new members, lobby to expand their turf and prevent foreign-qualified professionals from practising in India. Their standards and rules have legal sanction. No professional association severely punishes the individual and the firm he/she works for, for carelessness or involvement in or abetting a scam.

With the new Companies Act recognising class action suits, this is bound to change. A recent Supreme Court judgment awarded crores of rupees of damages against a medical practitioner for negligence. Change is in the air. Statutory bodies must prepare themselves for a new regime. But we must also ensure that the cost of these damages for malpractice or negligence do not make the services of the professionals too expensive.

The more difficult professions that show no signs of changing are the bodies that are not at all regulated. These include credit-rating agencies and management consulting groups. Other areas that are without statutory or self-regulation include sports associations controlling different sports. Credit-rating agencies have a spotty record with instances of good credit-ratings being immediately followed by frauds by the rated enterprise being exposed. Sports associations jealously guard their independence. Mostly led by top political leaders, bureaucrats, and businessmen, they lack vision for the sport they control and are not accountable for poor and deteriorating performance. They do not attempt to identify, train and nurture talent, but fully control the funds available for the sport. Self-regulation has not improved our sports. We need legislation to ensure that all such organisations are transparent in their governance, finances, and their leaderships are accountable for their work.

While Indian professional associations never severely punish erring members and their companies, they are very protective of the latters rights. For example, when a Delhi lawyer was arrested and handcuffed on a criminal charge, the lawyers agitated against their colleague being treated like one of their clients. There are innumerable horror stories of medical malpractice but abused patients are unable to exercise legal remedies, though in the recent past consumer courts have sometimes corrected this. Many times, the relatives of mistreated patients cannot even access their medical records. Medical experts will not publicly testify to what they might admit privately.

Self-regulation has been ineffective in India. Associations can set standards, conduct examinations, license practitioners, but misdemeanours should be covered by legislation, not self-regulation. Indeed, this should extend to all professions, for example, even to real estate agents, who have no minimum levels of qualification or service-quality, nor is there a mechanism to deal with wrongdoers. Self-regulating professional associations favour their members over customers and community. Parliament must create a new independent regulatory body for chartered professionals and over others that influence the market (like rating agencies), and sports associations that will be open, transparent and consultative. Disciplining professionals must not be left to ineffective self-regulation. The process must give confidence that complaints will be heard and action decided objectively. Professionals must follow a code whose violation triggers legal penalties.

The author is former director general, NCAER, and was the first chairman of CERC