Don’t appoint CAs as part-time members of authority, NFRA tells ministry – The Economic Times

Clipped from: https://economictimes.indiatimes.com/prime/corporate-governance/dont-appoint-cas-as-part-time-members-of-authority-nfra-tells-ministry/primearticleshow/85986619.cms

SynopsisRTI documents show that NFRA pushback was stronger than reported earlier. Appointment of practising CAs not only affects the independence, but also is a mockery of basic principles of independent regulation, authority wrote in response to the Ministry of Corporate Affairs, which had sought a report on participation of all members.

The National Financial Reporting Authority (NFRA) has asked the Ministry of Corporate Affairs (MCA) to avoid appointing practising CAs as part-time members of the regulator. The audit regulator, which is in its third year, has got into a war of words with its administrative ministry after it raised questions over treatment of part-time members in the authority.

ET Prime has accessed the correspondence between the regulator and the ministry through Right to Information (RTI).

In a letter dated June 29, the NFRA said, “While it is true that the amendments carried out in 2019 have strictly limited the role of such part-time members, government would be, nevertheless well advised to consider eschewing the appointment of such persons.” As per the Companies Act, the ministry is the appointing authority of employees of the NFRA.

The regulator used terms such as mockery and travesty to describe the current state of affairs. “In our considered opinion, it is travesty of independent audit regulation, and a mockery of the basic principles underlying the same, to have practising CAs even as part-time members of the authority. Apart from substantive objections to such membership, this also results in appearing to cut at the independence of the regulator,” the letter signed by NFRA AGM Swati Singla said. In addition to three ex-officio members from among the office bearers of Institute of Chartered Accountants of India (ICAI) namely Nihar Jambusaria, MP Vijayakumar and G Sekar, the ministry had appointed two senior practising CAs Amarjit Chopra and Anil Sharma as part-time members last year.

Last week, ET Prime reported about the escalating tensions between the ministry and the regulator in the past few months.

On September 2, the regulator released the letters sought by ET Prime under RTI. The letters revealed that NFRA’s concerns are deeper than reported earlier.

Drawing attention to the fact that five of the nine part-time members, who have presently been nominated, are chartered accountants in practice, the regulator said these appointments fly in the face of international norms as these members fall under the disciplinary jurisdiction of NFRA.

“The globally accepted principles of independent audit regulation do not in any manner, countenance the presence of CAs in practice in any decision-making processes or bodies of the regulator. In fact, it may be mentioned that the International Forum of Independent Audit Regulators (IFIAR) makes membership of the IFIAR incumbent on the audit regulator being independent of the audit fraternity,” the regulator said in the letter.

Kept out of ‘important decisions’
The regulator’s response came in reply to a ministry letter dated June 28 which sought a ‘report’ regarding “participation of all members (including part-time members) of the authority while taking important decisions”.

It added: “These issues with the approval of competent authority.”

The ministry’s report referred to the formation of the technical advisory committee (TAC) and alluded to such “important decisions” taken without consulting all members earlier too. The letter came after representations from the part-time members, some of whom are said to have met the secretary, MCA.

“It has come to the knowledge of this ministry that a consultation paper on enhancing engagement of stakeholders has been issued by NFRA on June 8, 2021, which is based on the recommendation of Technical Advisory Committee (TAC) of NFRA. However, it appears that in the formation of such [a] committee, the finalisation of its terms of reference as well as in the issue of the said consultation paper, all members of the authority were not apprised,” the ministry deputy director Pranay Chaturvedi said in the letter.

“It appears in the past as well, important decisions have been taken without duly discussing those matters with all members of NFRA,” Chaturvedi said.

Responding to this, NFRA referred to subsections 2, 3, 3a and 3b of Section 132 of the Companies Act and said the role of part-time members is limited to recommendations of auditing and accounting standards and all other matters shall be handled by the executive body of the authority comprising the chairperson and full-time member. Subsections 3a and 3b were inserted in August 2019, almost a year after the NFRA came into being.

“As per subsection 3b of Section 132, it is the executive body of the NFRA, consisting of the chairperson and full-time members, that is solely entrusted with the discharge of functions under subsection (2) (other than clause (a)) and subsection (4). It is clear beyond any doubt, from a plain reading of the above-referred provisions, that the body, inclusive of part-time members, is entrusted only with the functions specified in clause (a) of subsection 2,” NFRA’s Singla wrote in her reply.

Explaining the role of the part-time members, she wrote, “All recommendations on the formulation and laying down of auditing and accounting standards are required by the rules to emanate from recommendations of the ICAI. Consequently, meetings of the full body of the authority, inclusive of the part-time members, have been convened whenever such agenda items are proposed by the ICAI for consideration. All other work of the authority has been carried out by the executive body.”

The letter assured the ministry that, “It will be evident that the work of the authority is being taken up strictly in accordance, and in complete compliance of the provisions of the Act.”

NFRA’s current struggle is in some ways reminiscent of the resistance faced by the first chairman of Securities and Exchange Board of India (Sebi) GV Ramkrishna. Armed with a free hand from the then Prime Minister PV Narasimha Rao and some whacky sense of humour, the seasoned bureaucrat liberated the stock market from the stranglehold of BSE (formerly Bombay Stock Exchange) brokers.

Favourable public opinion following the Harshad Mehta scam of 1992 was a tailwind for Ramkrishna, who passed away recently.

Different models abroad
Large scams have often given birth to new regulatory bodies world over, but their governance models have differed. Big accounting failures such as Enron and Worldcom paved the way for an independent audit regulator in the US. The Public Companies Accounting Oversight Board (PCAOB) came into being after the enactment of Sarbanes Oxley Act in 2002.

It has five full-time members appointed by the Securities Exchange Commission in consultation with the Federal Reserve and Treasury secretary. It currently has three members of which two come from accounting background and one from law. It does not have a part-time member.

Duane M Desparte was named the acting chairperson of the body in June and has had stints in Deloitte and Arthur Andersen in the past. Desparte joined the board after retiring from Exelon Corporation, where he served as corporate controller and in other financial roles for 15 years, following an 18-year career in the audit assurance business.

Thus, the PCAOB doesn’t shun people with audit backgrounds completely. Having evolved over the last 20 years, the board has over 800-strong staff to help regulate the profession. Despite its relatively long history, PCAOB is not immune to political changes as the Biden administration sacked its earlier chief William Duhnke, a Donald Trump-era appointee, in June earlier this year.

In the UK, the Financial Reporting Council (FRC) is the body governing the audit profession. The Board of FRC comprises the chairman, the chief executive, the chair of the Regulatory Standards & Codes Committee, the chair of the Conduct Committee, the chair of the Supervision Committee and other non-executive directors. The non-executive directors come from various backgrounds such as law, actuary and industry.

The FRC is also headed by an interim chair Keith Skeoch, while Jon Simpson is its chief executive. Recent reports said that the UK government has initiated the process to appoint a new chair and six non-executive directors. Last year, the FRC told the Big 4 Accounting firms – KPMG, Deloitte, EY and PwC to separate their auditing divisions from the rest of their operations by June 2024 after the collapse of outsourcing firm Carillion and retail chain BHS.

Other Indian regulators
Financial-sector regulators in India use various names such as board, authority or commission for their central decision-making body. While the Reserve Bank of India (RBI) has a central board of directors consisting of official and non-official directors, Sebi is a board comprising whole-time and part-time members. Insurance Regulatory and Development Authority of India (Irdai) is an authority like NFRA and the Insolvency regulator is a board like Sebi. The Competition Commission of India is the only regulator without any part-time members at present.

An ET Prime analysis of financial-sector regulators and their board composition showed that NFRA has the highest number of part-time members at nine, followed by seven for RBI and six for Insolvency and Bankruptcy Board of India (IBBI).

Balance of authority@2x

The audit regulator also has the highest ratio of part-time members proportionate to the full-time at 1:9. Though some regulators such as RBI have several part-time positions lying vacant at the moment (only three non-official directors in the eminent persons category against a maximum of 10), even at full strength, the ratio would not cross 1:4.

As the term of current NFRA chief Rangachari Sridharan draws to a close, the ministry has called for applications for the posts of a chairperson and three full-time members. If these posts are filled, NFRA’s ratio would come on par with others.

In none of these regulators, the regulated entities have any representation in the central body. For example, the brokers or investment bankers do not have any representation in Sebi and bankers do not have representation in RBI Board and same with IBBI and Irdai. Interestingly, president of ICAI has an ex-officio part-time membership in Irdai in addition to a similar position in NFRA.

Striking balance
Senior members of the community feel that while NFRA might have acted well within its rights, its suggestion to keep the CAs completely out of the authority is a bit of a stretch.

“About 90% of the community is engaged in tax-related work. Only 5%-10% are into audits and the experts among these are even fewer. If you do not take them, where will you get the expertise? And, why do you go in with the assumption that they will be prejudiced?” asked a former president of ICAI.

He said independent members might not have the calibre to go into the technical aspects. “Even at the institute, the people who are popular get elected. They might not be the ones with expertise. Therefore, my feeling is there should be better coordination within the government to bring about a good balance,” the former president said.

Some members pointed out that even the TAC, which has been at the eye of the storm, had four chartered accountants among its constituents. These include its chair professor R Narayanaswamy, S Subramanian of Titan Industries, Gargi Ray of Infosys Consulting and Vidya Rajarao of Fraudopedia. Of these, Ray and Subramanian represent preparers, while Rajarao came with audit experience having been a partner at Grant Thornton in the past.

A member of the committee said the key difference was that TAC was not a decision-making body, yet the committee was formed with equal representations from preparers, auditors and users to take into account different perspectives and members currently practising were deliberately kept out to avoid any conflicts.

When Dalal Street brokers wondered how a person who has never purchased a single share regulated the share market, Ramkrishna is said to have silenced them by quipping, “Is it necessary to have had a heart attack to be a heart doctor?” While some repartees are forever, the reality is that not everyone can become a cardiac specialist – it takes years of gruelling course of education and practice.

As NFRA looks set to enter the next phase, it has to work with the government to find that fine balance between independence and expertise.

(Graphic by Sadhana Saxena)

The latest from ET Prime is now on Telegram. To subscribe to our Telegram newsletter click here.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s