The changes in the CA Act will improve accountability and governance in the audit profession | Photo Credit: PRASHANT NAKWE
The ICAI must shed its ‘Licence Raj’ baggage and become more relevant to the needs of the changing world; IIAs may not be a bad idea
The Bill to amend the the Chartered Accountants Act, 1949, the law that governs the Institute of Chartered Accountants of India (ICAI), was passed in Lok Sabha on Wednesday. The Bill was introduced in Parliament on December 17, 2021.
The key changes are:
Discipline: (a) the ICAI’s disciplinary committee and board of discipline will be chaired by non-CAs, and its elected council members will no longer be in a majority in them;
Governance and administration: (b) the term of the ICAI’s council will be raised from three to four years, and the maximum number of consecutive terms for its elected members will be cut to two from the current three;
(c) the ICAI’s secretary will replace the ICAI’s president as its chief executive and perform the functions to be specified;
(d) the ICAI will appoint its auditor from the Comptroller and Auditor-General of India’s panel of CA firms; and
(e) the government will form a coordination committee for the ICAI and the Institutes of Cost Accountants and Company Secretaries of India.
If done well, these changes should strengthen the ICAI’s accountability, governance, and administration. The Parliamentary Standing Committee on Finance has endorsed these changes and has further recommended an end to the ICAI’s monopoly in certification.
Exams and articleship are the rites of passage for CA aspirants. The exams are reputedly hard to crack. The three-year articleship gives hands-on training. That said, senior industry managers bemoan that many CAs don’t have what it takes to succeed in the corporate world such as analytical ability, critical thinking, appreciation of the business context, grasp of technology, and communication and presentation skills.
CA students don’t have in-class interaction. Also, the coaching is focused on cracking exams than facilitating understanding and application. Of course, the unpredictability of exam outcomes doesn’t help.
Further, today’s school leaver thinks about ‘cool’ careers like MBA, law, AI/ML, data science and web design. So, it’s no surprise that CA student enrolment in 2021 was a third lower than in 2010.
The ICAI’s record in disciplining its members is even more problematic. There have been persistent complaints that the ICAI is lax in acting against errant members.
On the occasion of the Chartered Accountants day on July 1, 2017, Prime Minister Narendra Modi ticked off the CA community for its lack of quality and integrity. It was a serious indictment of the ICAI’s self-regulation.
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.
Chartered accountancy is an odd fusion of medieval, colonial and licence raj institutions and practices. Articleship is a source of cheap, and tame, labour for some practitioners. The idea of training by members of a trade association goes back to medieval guilds.
Much of the work that CAs do and clamour for is a remnant of the licence raj. Many businesses and professions have changed beyond recognition as a result of the economic reforms started in 1991. The demutualised and technology-driven National Stock Exchange has transformed stock-broking.
Indian IT and pharma companies now compete successfully with the best in the world. India’s entertainment industry has a worldwide audience. Even in a licensed profession like law the five-year degree has become a sought-after qualification.
In contrast, 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.
The focus of Indian business back then was on how to make money by beating the system rather than by improving efficiency, relevance and competitiveness. CAs greatly benefited from that system. They kept beseeching the government for mandatory work such as issuing import utilisation certificates, tax audit, public sector bank branch audit, concurrent audit, and so on.
Most of such work is of dubious value. Ironically, among CAs “professional development” does not mean skill upgradation but is code for getting low-value work from government entities. Elected council members have no reason to rock the boat. This is not sustainable.
CA in a changing world
AI/ML is already playing a significant role in medical diagnosis and legal drafting and case analysis. Accounting and auditing are more amenable to replacement of humans by technology. Artificial intelligence, robotics, and other technological advances are likely to reduce the need for human intervention in accounting.
Also, recent administrative reforms aimed at ease of doing business and ease of living, such as faceless tax assessment, easy filing of tax returns, prompt refunds, rising threshold for tax audit, and abolition of GST audit have greatly reduced the availability of captive, government-mandated, make-work business for CAs.
Puzzlingly (or perhaps not), overseas accountancy qualifications such as ACCA and CIMA are getting more popular in India, perhaps because they are recognised worldwide, are more relevant to current and future needs, and are accepted even in India by global companies and global accounting firms.
Indian Institutes of Accounting
The Parliamentary Committee’s suggestion to set up a string of Indian Institutes of Accounting (IIAs) on the lines of IITs and IIMs is innovative. The IIAs will offer a five-year full-time and broad-based degree in accounting, auditing and related areas and their graduates.
At one level, they will end the ICAI’s statutory monopoly over certification. More competition should result in better quality and higher standards of conduct. Though the ICAI and the IIAs are different, they have to compete for the same talent pool.
At another level, IIAs can greatly enhance the quality of education with a wholesome curriculum. By broadening access, they can make the accounting community more inclusive and socially diverse.
Accounting institutes in other countries including the UK have changed. The Bill and the Parliamentary Committee’s report can be seen as efforts to drag the ICAI to the contemporary world, kicking and screaming if needed.
The ICAI’s leadership needs to ponder and explain the reforms to its membership. It would be wise to read the proposed changes as a warning and respond maturely.
The writer is a Retired Professor of Finance and Accounting, Indian Institute of Management, Bangalore, and Chair, Technical Advisory Committee of the National Financial Reporting Authority. Views expressed are personal
Published on March 30, 2022