Going by the spate of frauds that have taken place in banks over the years, it is obvious a large number of auditors have failed to do their job properly. It is not just banks, one often hears of money being misappropriated or embezzled or siphoned out from companies, but rarely gets to read about the action taken against the erring auditors. Indeed, the oversight of the Institute of Chartered Accountants (ICAI), the self-regulatory organisation for chartered accounts, leaves much to be desired. Few auditors have been pulled up, fewer penalised. As Mohandas Pai, former Infosys CFO, has noted, while the world moved ahead, the ICAI has stood still, its architecture hasn’t changed. What’s also surprising is that despite the Satyam episode in 2009, the oversight of the auditors community has remained with the ICAI for such a long time.
Which is why the National Financial Reporting Authority (NFRA), conceptualised in the Companies Act, 2013, as an independent regulator for auditors, must be a strong organisation with enough teeth to be effective. While the Bill to set up the regulatory body for auditors is expected to be tabled in Parliament in the current session, what will be critical are its powers. The NFRA must be a strong body set up on the lines of a Sebi (Securities and Exchange Board of India), manned by persons completely outside of the auditor community and funded adequately. Unless the NFRA is an empowered entity that can punish and penalise, it will not be taken seriously; for it to have credibility, it must have no connection at all with ICAI. Penalties for errant practices must be stiff. The model of the Financial Reporting Council (FRC) in the UK could be followed; while the FRC focuses on the large auditing firms who command a big share of the market, in India it is important the smaller firms are also monitored.
How derelict the ICAI has been can be gauged from the standing committee report of December, 2016, in which the ministry of corporate affairs (MCA) found that while the ICAI had looked into around 1,975 instances of malpractices, the institute had taken disciplinary action only in the case of Satyam Computers. In six other cases, the members had been reprimanded, while penalties of one year or more had been imposed on 14 members. The report is an indictment of the ICAI with the MCA pointing out that, despite Sebi having suspended some companies for errant practices, the ICAI
hadn’t even taken the necessary action despite ‘reminders’. Indeed, the large fraud at Punjab National Bank may not have remained undiscovered for so many years had the auditors done their job, of red-flagging discrepancies in the financial statements.
While the government is also looking to empower the authorities to confiscate the property of any offenders, alleged to have perpetrated a fraud of over `100 crore, were they to ignore the summons of either the courts or the police, it is far more helpful to spot the problem early in the day. The Fugitive Economic Offenders law may, no doubt, help the banks recover some money as the investigative agencies can attach the properties. However, it will not be easy to sell these properties as buyers are often wary of disputed assets. Also, whether the fear of their properties being sold is enough to bring the offenders back to the country remains to be seen. But it would nonetheless act as a deterrent.