Extra teeth to tackle corporate misconduct

A government-appointed committee to review the quality of audits has recommended the powers of the National Financial Reporting Authority (NFRA) be enlarged to act against auditors and company managements. These include seeking information from, and acting against, promoters, directors and executives in the course of investigation into the conduct of auditors. The Companies Act now restricts NFRA to investigating misconduct by auditors. It is toothless to deal with violations that exceed this narrow definition. The authority had, last year, highlighted the widespread malaise of statutory auditors not filing their annual returns, which are meant to provide details of withdrawing from audit assignments.

The committee has also set out new conditions for auditors, like reviewing the list of proscribed non-audit work in large companies, looking into the books of subsidiaries, standardising the manner of audit qualifications, joint audits for certain categories of companies, and providing a statutory backing for forensic audits. These bring oversight of Indian auditors in alignment with global practices. In a separate legislation, GoI has introduced a layer of supervision into the disciplinary process of the self-governing bodies for chartered accountants, cost accountants and company secretaries.

GoI has been moving with caution on improving regulatory oversight of auditing while allowing the independence the profession is accustomed to. Forensic audits into corporate malfeasance and assessment by NFRA have emphasised the inability of the professional bodies to deter their members from rogue activity. A parliamentary standing committee had even suggested setting up a new body to bring the accounting profession up to speed in the current business environment. GoI has not pushed the envelope that far, but it has set deadlines for hearings into disciplinary matters and set out stiffer penalties for wrongdoing. More power to NFRA in amendments to the Companies Act meshes in with heightened scrutiny of the auditing profession.