What changes for auditors and companies with the CA Amendment Bill

The Chartered Accountants, the Cost and Works Accountants and the Company Secretaries (Amendment) Bill, 2021, was passed in the Lok Sabha on Wednesday (March 30) amid accusations by the Opposition parties that the government is interfering in the functioning of autonomous bodies.

The Bill, which was first introduced in the Lower House on December 17, 2021, seeks to amend the Chartered Accountants Act, 1949, the Cost and Works Accountants Act, 1959 and the Company Secretaries Act, 1980, that were enacted to make provision for the regulation of the profession of the chartered accountants, cost accountants and company secretaries, respectively.

In 2018, the government established the National Financial Reporting Authority (NFRA) as an independent regulator for the auditing profession.

“The need for establishing NFRA has arisen on account of the need felt across various jurisdictions in the world, in the wake of accounting scams, to establish independent regulators, independent from those it regulates, for enforcement of auditing standards and ensuring the quality of audits to strengthen the independence of audit firms, quality of audits and, therefore, enhance investor and public confidence in financial disclosures of companies,” the government had said.

What the Bill seeks to do

It seeks to appoint non-Chartered Accountant (CA), non-cost accountant and non-company secretary as the presiding officer of the disciplinary committees of the respective institutes.

The three institutes are the Institute of Chartered Accountants of India (ICAI), Institute of Cost Accountants of India (formerly known as ICWAI), and Institute of Company Secretaries of India (ICSI).

Finance and Corporate Affairs Minister Nirmala Sitharaman said the amendments will not infringe upon the autonomy of the three institutes, instead, it will enhance the quality of audit and improve the country’s investment climate.

According to her, the amendments “will make the institutes more responsible and accountable” and encourage them to adopt global best practices. All stakeholders should have greater confidence of audit statements, she emphasised.

“On account of changes in the economic and corporate environment in the country, it has become necessary to amend the Acts. Further, recent corporate events have put the profession of chartered accountancy under a considerable scrutiny,” Sitharaman had said in the “Statement of objects and reasons”.

Smt @nsitharaman‘s full reply on the discussion of The Chartered Accountants, the Cost and the Works Accountants and the Company Secretaries (Amendment) Bill, 2021 in Lok Sabha.

Watch here: https://t.co/fbBlVw5D5S

— NSitharamanOffice (@nsitharamanoffc) March 30, 2022

Poor disciplinary record

On the occasion of Chartered Accountants Day on July 1, 2017, Prime Minister Narendra Modi had criticised ICAI’s disciplinary record. He had said that the ICAI had only prosecuted 25 errant auditors in the last 11 years, and 1,400 cases were pending.

The amendments to the Acts are based on the recommendations of a High Level Committee constituted by the Ministry of Corporate Affairs, among other things, to examine the existing provisions in the Acts and the rules and regulations made thereunder, for dealing with the cases of misconduct in the three professional institutes, and with a view to strengthening the existing mechanism and ensure speedy disposal of the disciplinary cases.

Strengthening disciplinary mechanism

The Bill proposes to “strengthen the disciplinary mechanism by augmenting the capacity of the Disciplinary Directorate to deal with the complaints and information and providing time bound disposal of the cases by specifying the time limits for speedy disposal of the cases against members of the Institutes.”

“Address conflict of interest between the administrative and disciplinary arms of the Institute; provide for a separate chapter on registration of firms with the respective Institutes and include firms under the purview of the disciplinary mechanism.

“Enhance accountability and transparency by providing for audit of accounts of the Institutes by a firm of chartered accountants to be appointed annually by the Council from the panel of auditors maintained by the Comptroller and Auditor-General of India.

“Provide for autonomy to the Council of the respective Institutes to fix various fees.”

The Bill provides for the setting up of a coordination committee headed by the Secretary of the Ministry of Corporate Affairs. It will have representations from the three institutes.

The minister said that earlier, the three institutes had signed an MoU to set up a coordination committee but the proposal could not take off. The committee would help in managing the resources of the institutes, she said, adding that IIMs and IITs too have coordination committees.

The Bill also provides for registration of firms with the institutes and it will help in paving the way for Indian accountancy firms to grow big, she said. It also proposes to enhance the quantum of fines for partners and firms found guilty of misconduct.

Increase in fine amount

Upon inquiry, if the Disciplinary Committee finds that a member is guilty of a professional or other misconduct, it may reprimand the member and record it in the Register of members or remove the name of the member from the Register of members permanently or for such period, as it may think fit; or impose such fine as it may think fit, which is from Rs 2 lakh to Rs 50 lakh under various clauses, depending on first-time misconduct or repeatedly found guilty.

Opposition parties question govt

In the Lok Sabha, Congress leader Adhir Ranjan Chowdhury questioned the Modi government. “Through this Bill, the government is making a subtle and deliberate attempt to consolidate power and to snatch away the independence of institutions by dismantling the autonomous framework of the concerned institutions.”

TMC member Saugata Roy asked Sitharaman as to what specific steps her ministry had taken to prevent corruption by chartered accountants.

“I would like to know what are the specific steps taken to prevent CAs from bloating the figures of companies so they can cheat the trusting public. Harshness towards erring auditors was not audible in the minister’s reply,” he said.

NCP leader Supriya Sule said that her main concern was about the autonomy of the three accountancy institutes. “You gave the examples of IITs and IIMs. But these institutes are funded by the government while the these are not. How can they be compared? Doesn’t this take away the autonomy of these institutions?” she asked.

DMK leader A Raja said the government has “some agenda” and added that the Bill should be sent to a Select Committee. “Some of the provisions of the Bill deserve to be appreciated but some create apprehensions that the government has some agenda. For Bar Council, the chairman is a lawyer. For Medical Council, chairman is a doctor, but for ICAI committee, chairman will be a non-CA? Not being judge of one’s own case is applicable to individuals, not for institutions. In case of institutions, domain knowledge is important,” he said.

Shiv Sena’s Arvind Sawant too demanded that the Bill should be sent to the Standing Committee.

BSP’s Danish Ali accused the government of trying to nationalise the autonomous body ICAI which has worked well for over 70 years.

ICAI wanted ‘status quo’

The Bill was referred to the Parliamentary Standing Committee on Finance for scrutiny. ICAI had raised its concerns to the panel but they were dismissed as the committee endorsed the Bill.

ICAI wanted “status quo” to be maintained on the constitution of the institute’s disciplinary committee and asserted that the current system is working well. ICAI president Debashis Mitra had said, “We are fiercely proud of our autonomy.”

Support for Bill

“If done well, these changes should strengthen the ICAI’s accountability, governance, and administration,” R Narayanaswamy, retired Professor of Finance and Accounting, IIM, Bangalore wrote in Business Line.

“CA has not kept pace with the changes in India’s dynamic economy and changing society. The ICAI was set up in 1949 largely as the Indian version of the UK institute. Its evolution since then has mirrored the rise of the licence raj that was characterised by uncompetitive capital, product and labour markets, worthless form-filling and box-ticking, and incredibly high tax rates,” Narayanaswamy, who is also Chair, Technical Advisory Committee of the National Financial Reporting Authority, said.

“In 2018, the government set up the National Financial Reporting Authority as India’s first independent regulator of accounting and audit. The proposed changes in the composition of the ICAI’s disciplinary arms will further limit its role. As a result, the ICAI will be effectively reduced to an examination board,” he added.

Supporting the Bill, BJP MP Anurag Sharma said, “Today, India has the highest number of CAs (3.5 lakh) in the world after America, but unfortunately, none of our best practices are recognised internationally because of lack of a disciplinary committee or work in the disciplinary committee.”

“Today, our people from the software industry lead the world, but even when we have so many CAs, why are our audited statements not accepted in NASDAQ or Worldwide? It is because certain best practices have not been followed. In this regard, I am happy to note that today, global best practices adopted in the US, UK, Australia, Canada and South Africa have been studied by the Ministry, they have brought in some of these changes,” he added.