Tag: regulator

India urgently needs to rethink the way it wants to regulate the audit profession. One cannot have a situation where multiple regulators individually make conflicting interpretations of the quality of work done by a statutory auditor on an auditee entity and award Kangaroo Court-type punishments.

It is dangerous to allow a system where regulators — those who don’t hesitate to take the extreme step against an entire audit firm — are allowed to take isolated actions against an entire audit firm as regards the entities overseen by them. Banning the entire firm for the misconduct of a handful of people is not the right approach, unless there is a systemic failure.

Multiple regulators

The current system of having multiple regulators — ICAI, NFRA and respective financial sector regulators such as RBI, SEBI and IRDAI — to deal with audit failures is turning into a regulatory minefield of sorts.

The sooner a common framework for action against auditors is put in place — say a council for coordinated action against auditors with representation from MCA, ICAI, NFRA, SEBI, RBI, IRDAI and IBC — the better would the outcomes be, both for the society and the trust that could be reposed on the financial system.

Otherwise, what will happen at the ground level is a situation where the ‘operation has been successful but the patient is dead’. Will you close down a hospital for the fault of a surgeon, wonders a veteran audit professional with decades of experience when quizzed about the recent RBI action on an audit firm — Haribhakti & Co LLP — for its failure to comply with the specific direction of the central bank on statutory audit of a systemically-important non-banking finance company.

This audit firm had recently been barred for two years by the central bank from undertaking any type of audit assignments in any of the entities under its supervision. Now, this isolated action (apparently neither NFRA nor ICAI were consulted on the Haribhakti matter) has raised several questions than providing answers. The problem in this case is that it is not clear whether the punishment is being awarded to the audit firm for audit failure or for any governance issue.

Time is ripe when all regulatory actions on disciplining misconduct are supported by a detailed public disclosure — instead of cryptic press releases — of the reasons behind such action. Otherwise, it would lend credence to the contention of critics that in the name of regulatory action what is at best playing out is a Kangaroo Court. The bottomline is that one must not punish without setting expectations from an audit firm and an opportunity of remediation is handed out.

“Ideally, if at all there is an action on an audit firm, it is appropriate that it is done by a body that regulates the audit profession, which evaluates the quality of the audit assignment in relation to the prescribed auditing standards by reviewing the audit work papers before concluding on the deficiency, if any, and deciding the corresponding punishment.

“You normally don’t ban an institution unless the audit quality is poor across the entire institution and that too it is initiated only after an opportunity is given to remediate deficiencies. I am not aware of the facts in this case, but all I can say is that a blanket ban is like pressing the nuclear button, which is the extreme action taken as a last resort, as it results in a lot of collateral damage, including on those not involved in the alleged deficient audit assignment and who otherwise are conducting high quality audits,” says PR Ramesh, former Chairman of Deloitte India.

Ashok Haldia, former Secretary of the CA Institute, noted that multiplicity of regulators is against the principles of effective regulation. “It is unjust, unfair, unsustainable and is counterproductive to maintaining and enforcing quality in audit. It is necessary to have only one regulator or a mechanism of joint regulation which consolidates standards of performance for auditors of different regulators — RBI, SEBI, NFRA, ICAI and others — and adopt a unified framework for enforcing accountability of auditors and all those in the financial reporting value chain,” he said.

Many flaws

Amarjit Chopra, former President of the Institute of Chartered Accountants of India (ICAI) and now part-time Member of NFRA, said that the RBI’s recent move of acting in isolation and debarring the firm has many flaws. “It would mean that a firm, which cannot audit RBI-regulated entities, can still continue to audit other entities whether listed or unlisted. This, to my mind, may not be justified. In my view need of the hour is to have a common framework for action against the auditors, if it is needed and MCA should take the lead on this,” said Chopra.

Noting that the issue was a governance issue, he also called for action against directors — both executive and non executive — and suggested that they, too, be barred from holding any post of director in any company for a period of minimum three years.

Chopra wonders how many regulators an auditor may have to contend with and whether action in isolation by one of the regulators alone is desirable. “There is no dispute to the fact that auditors need to be regulated. But by which regulator is an important issue. Not for a moment I am trying to suggest that the RBI does not have the power to do so. But their acting in isolation and debarring the firm for RBI-regulated entities has many flaws,” he said.

Chopra noted that he was well aware that no one may want to surrender their turf, but then it causes immense harm to the auditing profession as no auditor may be keen to live in a state of uncertainty with regard to the number of regulators that he faces and each one of them going for a different kind of action in such cases.

Haldia said that a firm and its partners have joint responsibility to ensure quality of audit. In case an audit failure has traces to failure of the firm in discharging its responsibilities, the firm may also be held liable for punitive action together with the delinquent partner, he said.

Can all pile in?

In the context of RBI action on Haribhakti & Co LLP, legal experts held that other regulators — NFRA, ICAI and SEBI — can also get into the act and look at disciplinary action against the auditor from the perspective of their regulatory jurisdiction.

Pritika Kumar, Founder & Sentinel Counsel, Cornellia Chambers, said: “Given the powers of these regulators, in my view, they all can investigate and look at initiating disciplinary action in their own field of operation against the auditor and/or members of ICAI who may be involved in this matter.”

Ruby Sinha Ahuja, Senior Partner, Karanjawala & Co, said that the power and jurisdiction of any regulator is circumscribed by the statute, and order of RBI barring the CA firm does not give an automatic right to other regulator to start proceedings against the firm.

“Any regulator can act, provided it has jurisdiction over the issues raised by RBI in its order,” she said, adding that there is a moot question as to whether SEBI will have jurisdiction in the said matter over a CA firm.

Bottomline

The main point is one would do well to look at auditors at best as a thermometer — it may tell you the temperature, but don’t expect it to predict clots in arteries. Fraud detection and reporting will be a big ask on statutory auditor of large companies, especially when they are paid so low. Multiple regulators will only add to the auditors’ fear quotient.