Auditor Integrity set to be ground play of proposed Accounting Regulator

Background

Hon. Prime Minister of India made the announcement on the occasion of the foundation day of the Institute of Chartered Accountants of India, which shattered the community. Prime Minister not only criticized the accountants but went one step ahead and announced the agency to check the Chartered Accountants.
National Financial Reporting Authority (NFRA) was proposed in the Companies Act under Section 132 to be the accounting and auditing regulator. Section 132 was probably the only Section of Companies Act, which was not notified yet. This article takes the stock of various issues pertaining to the Auditors, Regulators and their activities.

Why NFRA was not liked by CAs ?

Chartered accountants (CAs), for last 4 years, have been opposing this notification. There are many valid reasons for them to lobby with ministry to delay or avoid notifying Section 132

  1. NFRA was given the powers under the Companies Act to investigate, into the matters of professional or other misconduct committed by any member or firm. These powers can bring significant number of CAs to the books who refrain to comply with the accounting standards.
  2. There are stringent penalties to be imposed along with the provision of Jail term for the non-complying auditors
  3. This new Regulator would cut the wings of ICAI to be the Examination Conducting body.

Why this move is important ?

External Auditor’s opinion play a significant role in the Indian Financial markets. A third party opinion on the representations made in a company’s financial statements serves as assurance of precision. It helps banks to lend and builds confidence in investors.

However, when investors learn of financial statement misrepresentations, subsequent litigation often concentrate on the quality of the audit opinions, and role of auditors in arriving at opinion.

Though identification of the frauds is not the responsibility of the auditors, they are expected to be diligent and make appropriate disclosures in the financial statements to generate alerts for the stakeholders of the financial system.

What is the reality ?

There are multiple auditors who are found to be flaunting the norms and best practices and selling their opinion for few pennies. In recent cases of the frauds, auditors were seen to be hand in glove with the promoters. However, you can not blame the whole community for the dishonesty of few members. In every community their are some rotten eggs which needs to be removed. But the statistics provided by the Prime Minister is an eye opener. In the age of the scams, frauds and rampant money laundering incidences reported by the Media, the Institute of Chartered Accountants was able to take action against only 25 members in 10 years.

In one of my previous articles i have written about the trends in the Auditor integrity compromises.

Auditor Integrity check is a diverse practice which gathers background of the audit firm and the Audit Partner. Globally, Riskpro is the leader in the Auditor Integrity checks and services. This service is helpful to the investors, stakeholders, financial and non financial institutions to understand the integrity of the financial statements presented to them.

 

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About the author

Apurva Joshi is the forensic accounting evangelist. She authored couple of books on the subject. She is a director in Riskpro Management Consulting. She is also an independent director of Quickheal, leading anti virus company in India

One Response

  1. Constitution of NFRA threatens the independence of ICAI.

    What could be the alternative to achieve objectives of NFRA without it’s Constitution and safeguarding Independence of ICAI ?

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