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Tough Times Ahead for The Chartered Accountant: Nirav Modi and ICAI Shakedown

Senior journalist and communication strategist, A subject matter expert on bureaucracy, governance, PSUs, start-ups and policy matter.
Mar 22, 2018 2:38 PM 5 min read

Amidst skeletons tumbling out post the infamous Nirav Modi scandal, the Union Cabinet’s decision to setup a National Financial Reporting Authority (NFRA) regulating Chartered Accountants (CAs) in India is considered as a way forward in monitoring the financial audit of large companies.


However, the big question is, can the super regulator recover the money lost in frauds? If the answer is no, then isn’t it more logical to strengthen the existing system rather than creating another layer of bureaucracy through NFRA?

Independent Regulator for Chartered Accountant Profession post Nirav Modi vs. ICAI

The idea of NFRA is not new. The constitution of the independent regulator was a key recommendation of the Companies Act 2013, which came into force on April 1, 2014, but its establishment stayed in limbo.


It is quite evident that the Union Cabinet’s decision to set up the NFRA earlier this month has been prompted by the INR12,636 crore PNB scam that went undetected by auditors.


The power of the super regulator, which will oversee accounting standards and auditing norms at all listed and large unlisted companies, includes initiation of a probe into professional matters or misconduct of any member or a firm of chartered accountants. It also has the authority to impose penalties and debar a CA member or a firm.


Several observers have opined that the move is a knee-jerk reaction which will add to another layer of red tape. The Institute of Chartered Accountants of India (ICAI), the self regulatory body for CAs, has opposed the formation of NFRA on grounds that it would not be prudent to draw any conclusion against the profession until the disciplinary inquiry is concluded in the PNB matter and the role of all those who acted in fiduciary responsibility was established.


Factors Favouring NFRA Set Up


The set up of the NFRA also indicates a lack of trust in ICAI to effectively address malpractices indulged in by recalcitrant members. Till now, the ICAI has had the monopoly on scrutinising audit quality and granting licenses to CAs to practice and regulating them.


However, proponents of the NFRA argue that ICAI itself is to be blamed for creating a trust deficit, due to a failure to fulfil its oversight obligations. In spite of frauds after frauds such as Kingfisher, Satyam, Enron and Ketan Parekh being coming to light, ICAI continues to remain a cosy club of professionals chosing to ignore the blows dealt to its reputation by fellow members’ transgressions. According to government data, of the 1,972 disciplinary cases against Chartered Accountants considered by the ICAI till now, only the auditors of Satyam have been permanently disqualified from membership. In all other cases, the guilty members have been merely reprimanded.


Another factor which is in favour of the NFRA is the fact that over 50 countries across the world have moved away from self regulation and created independent audit regulators. Notable amongst them are the Public Company Accounting Oversight Board (PCAOB) in the US and the Financial Reporting Council (FRC) in the UK. There is a wider belief that self regulation works only up to a point and the market fails quickly in a self regulatory mechanism because of the inherent conflicts.  


Why Reinvent The Wheel?


Notwithstanding the arguments in favour of setting up of the NFRA, the question remains why to reinvent the wheel when two empowered institutions, Reserve Bank of India (RBI) and ICAI – both of which are products of Parliamentary discourse – already exist to tackle bank scams. Isn’t it necessary to fix accountability on these institutions and also streamline them so that they perform their duties, for which they are meant, in a more responsible and efficient manner?


The PNB fraud highlights lacunae not only in auditing but also in the enforcement of banking regulation. Had ICAI and RBI, the banking regulators, been tough and proactive, scams like this could have been detected much earlier.


And, yet, both the institutions are comfortably protected in their ivory towers while the government is busy making a new body which might step over the foot of the Securities and Exchange Board of India (SEBI) which also has the oversight powers over audit firms of listed companies.


Suggestions to Prevent Financial Fraud


ICAI argues that while it can penalise individual CAs, it cannot act against auditing firms indulging in corrupt practices. Against this backdrop, a Delhi-based CA, Sandeep Sharma, advocates revisiting the CA Act to give some legal teeth to the toothless tiger so that it can act against its erring members.


A paper titled “Frauds in the Indian Banking Industry”, which was published by IIM Bangalore has also listed several suggestions to prevent financial frauds.


The report suggests that banks should employ the best available IT systems and data analytics so as to ensure effective implementation of the red flagged account and early warning signals framework suggested by the RBI. As evident in the PNB scam, a good technology system could have made it impossible or at least extremely difficult for Nirav Modi and Mehul Choksi to bypass controls. 


The paper also suggests setting up of special fraud monitoring agency by respective banks. This move will require banks to improve their human resource management policies and hire experts trained in fraud detection.


Third, the regulator should design stringent measures so that CAs and auditors who figure in bank frauds are not able to get away with fraudulent financial statements. And for that, it is necessary to conduct investigations in a given time frame.


The RBI should nip fraud in the bud by ensuring that rules are being effectively implemented by banks and in case of violation, it should take strong punitive action.


In a radical use of technology to reduce fraud, Professor Jayanth R Varma of IIM Ahmedabad suggests the use of blockchain technology to make banking transactions more transparent. The technology would enable every link in the chain to be scrutinized publicly. The shibboleth of bank secrecy, Varma opines, should not be a cause for concern as borrowers themselves disclose information about large financing transactions in public statements.



Independent Regulator for Chartered Accountant Profession post Nirav Modi vs. ICAI 

Wait And Watch


Coming back to the NFRA issue, unfortunately, there have been instances in the past where setting up of agencies did not resolve an issue but only added up to files being piled up. The creation of the Serious Fraud Investigation Office (SFIO), post the Enron scam, to crack down on economic offences is a glaring example in this regard. There was no need to set up SFIO when SEBI and Excise and Customs departments were already there. The redundancy of the SFIO can be well gauged by the fact that as per an official data, since its formation in March 2007, the SFIO has investigated less than 100 cases and submitted less than 20 reports. Moreover, none of these cases was taken up suo motu.


Nevertheless, it is too early to say whether the NFRA will able to prevent financial frauds or it will become yet another redundant agency. Till then, ‘wait and watch’ is the only option left with us!