What is the issue?
- ‘National Financial Reporting Authority’ (NFRA) was proposed recently as an independent regulator for accounting and auditing professionals.
- But the authority is said to also constitute three part-time members from ICAI, which has raised troubling questions about its neutrality.
How did NFRA evolve?
- The Beginnings - The NFRA was first proposed as an independent regulator of accounting and auditing in the wake of the Satyam scandal.
- As the scam went undetected for many years by the company’s auditors, there are clear indications of auditor collusion in the fiasco.
- This created a public outcry for better regulations in the sector and a 2010 standing committee report had subsequently vouched for the creating NFRA.
- Stalemate - NFRA was a part of the Companies Act 2013, which was notified in 2017, but interestingly the clause related to NFRA wasn’t notified.
- Notably, Institute of Chartered Accountants of India (ICAI), which is currently the certifying and self-regulatory institution, had opposed NFRA.
- ICAI had vouched that it is doing a good job and a new regulator isn’t needed as it would merely add regulatory levels.
- Significantly, despite the strong support of the ministry of corporate affairs, NFRA couldn’t be notified, which indicates ICAI’s lobbying power.
- Revival - The recent Rs. 13,000-crore Punjab National Bank (PNB) fraud that seems to have broken the camel’s back on NFRA issue.
- This case slipped through a variety of audits by CAs that public banks are mandated to undergo (statutory, branch, concurrent, and stock audit).
- Also, the rising non-performing assets (NPAs) of banks have also raised questions about the failure of auditors to properly review asset quality.
What is the composition of NFRA?
- NFRA was touted to be a fully independent body that will consist of a chairperson, three full-time members and nine part-time members.
- Among the part-time members, one each from Ministry of Corporate Affairs (MCA), CAG, RBI, and SEBI, will be part of NFRA
- Additionally, two external experts (accountancy, auditing, finance, or law) and three ex-officio members from the ICAI (the president, and chairpersons of Accounting, and auditing boards) will also be members in NFRA.
- While none of the previous proposal had a provision for ICAI members to be included in the board, the inclusion of the 3 ICAI members is intriguing.
- Notably, ICAI members are practicing CAs, which clearly gives rise to a conflict of interest and also will bring the neutrality of NFRA into question.
What is the way forward?
- The separation of the regulator from those it regulates is a fundamental principle of good governance and followed universally.
- This is true of the Securities Board of India (SEBI), the Telecom Regulatory Authority of India (TRAI), and the Competition Commission of India (CCI).
- International Forum of Independent Audit Regulators (IFIAR) also stipulates to keep practicing auditors out of the regulatory mechanisms.
- Formal independence of the regulator is necessary to maintain trust and public confidence and this mandates keeping the ICAI away from NFRA.
- Importantly - CAs elect members of the ICAI’s council to represent their interests, and not the interests of investors, creditors and other stakeholders.
- Allowing ICAI representatives to have a say in the working of the NFRA is like letting the fox guard the hen-house.
Source: Business line
