CA- In The Line of Regulators Fire

In the profession of Chartered Accountancy, There is a one reliable one phrase. That the “two heads are better than one”. The whole professional activity of the Chartered Accountants pass through this and chartered accountants love to create partnerships among them. However, in some ways, this phrase is the opposite of 16th-century phrase that too many cooks spoilt the broth. For the profession of Chartered Accountancy, now there are too many regulators. The chartered accountants institute regulating profession and disciplinary, the RBI for banks statutory audits, SEBI , companies act for companies audits , IRDAI for insurance audits , Income Tax for furnishing incorrect information in reports , the banks for statutory audits and now the National Financial Reporting Authority (NFRA) for the overall working of the chartered accountants and their firms. Now it seems that so many regulators shall surely ruin it instead of making it a better profession of chartered accountancy.

Hence it is established that Chartered Accountants have fallen in the line of fire. CA’s are in a position where all are aiming their gun towards them. If CAs moves into their line of fire, they move into a position between them and the thing they were aiming at. The circumstances are not the same as of five years back. The scenario has totally changed and a walled iron door of their alma mater has forcefully opened by these regulators. Interference by a number of regulators shall be a challenge for the fraternity in the coming era. The problem comes when regulators have different views on the same matter, especially when it is about investigative powers. There should be one common approach, currently; everyone is trying to regulate auditors differently.

List of Regulators – CA- In The Line Of Regulators Fire

a. 2013 Companies Act for restrictions of work to the risk of class action suits

Section Sec 143(12) of the Companies Act 2013 reporting of fraud: Reporting of Fraud to Central Government within 60 days of knowledge of Auditor to Secretary, MCA through Registered Post with Speed Post and e-mail. This Section also applies to Secretarial & Cost Auditor, while carrying out the Secretarial Audit u/s 204 and Cost Audit u/s 148.

Section 144 of the Companies Act 2013 restricted the work: Auditors not to render certain services such as Accounting and bookkeeping services; internal audit; Design and implementation of any financial information system; Actuarial services; Investment advisory services/banking services. Further, the said services should not be rendered by the parent, subsidiary or associated entity of the Auditing Firm.

Section 147 of the Companies Act 2013 penalties: If an auditor of a company contravenes any of the provisions of section 139, section 143, section 144 or section 145, the auditor shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees. Provided that if an auditor has contravened such provisions knowingly or wilfully with the intention to deceive the company or its shareholders or creditors or tax authorities, he shall be punishable with imprisonment for a term which may extend to one year and with fine which shall not be less than one lakh rupees but which may extend to twenty-five lakh rupees. Further, where an auditor has been convicted under sub-section (2), he shall be liable to—(i) refund the remuneration received by him to the company; and (ii) pay for damages to the company, statutory bodies or authorities or to any other persons for loss arising out of incorrect or misleading statements of particulars made in his audit report.

Section 147 (5) Position after the Companies (Amendment) Act 2017:  Rule 9 has been omitted and the provisions of Rule 9 have been introduced in the Act as a proviso to Section 147 (5) of the Companies Act, 2013. The proviso to Section 147 (5) that has been incorporated reads as under- “Provided that in case of criminal liability of an audit firm, in respect of liability other than fine, the concerned partner or partners, who acted in a fraudulent manner or abetted or, as the case may be, colluded in any fraud shall only be liable.”

Consequently, Section 147 (5) reads as follows: “(5) Where, in case of audit of a company being conducted by an audit firm, it is proved that the partner or partners of the audit firm has or have acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to or by, the company or its directors or officers, the liability, whether civil or criminal as provided in this Act or in any other law for the time being in force, for such act shall be of the partner or partners concerned of the audit firm and of the firm jointly and severally. Provided that in case of criminal liability of an audit firm, in respect of liability other than fine, the concerned partner or partners, who acted in a fraudulent manner or abetted or, as the case may be, colluded in any fraud shall only be liable.”

Section 245 of the Companies Act 2013 class action suits: Members, as well as deposit holders of the company, can file class action suits against an auditor including audit firm. The matters which could be bought to test are any current, past or future actions, including desisting from one or more particular action that has not been taken yet. Further, in addition to auditors, the class suit lies for the Company, any of its directors, expert, advisor, consultant or any other person.

b. 2017 Income Tax penalty under Section 271J for submitting any incorrect report or certificate

Section 271 J of The Income Tax Act 1961 : The Finance Act 2017 has inserted a provision by way of section 271J which provides that where the Assessing Officer (AO) or Commissioner (Appeals) {CIT(A)}, in the course of any proceedings under the Income-tax Act 1961, finds that an accountant has furnished incorrect information in any report or certificate furnished under any provisions of the Act or the rules made thereunder, the AO or CIT(A) may direct that such accountant (professional) shall pay, by way of penalty, a sum of Rs. 10,000 for each such report or certificate. The said section has also included merchant banker and registered Valuer. The terms ‘accountant’, ‘merchant banker’ and ‘registered Valuer’ are defined in section 271J and a term professional is used for the same. Further, section 273B has also been amended to provide that if the professional proves that there was a reasonable cause for the failure referred in section 271J, then penalty shall not be imposable in respect of section 271J. However, for Chartered Accountants, this penalty of Rs 10000/- for each report and certificate shall be an additional deterrent as they are already obliged to comply with professional standards laid down by their own regulator ICAI. Surprisingly Where the penalty is levied by CIT (A), there is no remedy of appeal to the Appellate Tribunal.

c. 2017 Modi Ji address on CA day has added fuel against Auditors

The Prime Minister of the Country Shri Narendra Modi used the carrot and stick approach to address the fraternity of chartered accountants on CA Day of 1st July 2017. The festive mood of chartered accountants has evaporated by the sharp remarks on the working of Chartered Accountants and their Alma mater ICAI on disciplinary proceedings. At the one hand, Prime Minister Narendra Modi called chartered accountants a “big pillar” of the Indian economy and urged them to bring technological innovations to meet global standards. He showed trust in them and appealed them to take care of country economic health. He blamed Chartered Accountants hand in hand with those who looted the country. He declared it as the need of the hour and called chartered accountants to recognise and weed out those who helped such people/companies who were indulged in corruption during demonetisation. He bombarded the profession with so many allegations and questions the poor disciplinary proceedings against the members. The figures given by him were wrong. He questioned, Do you think that no more than 25 CA’s would have indulged in corruption? What is the reason that in the past 11 years there has been action against only 25 CA’s? His intent was clear, it was an address to introspect themselves before carrying the profession of chartered accountancy on their shoulders.

d. 2018 RBI against Statutory Auditors

In the month of June 2018, RBI decided to take auditors to task by warning them of stern punitive actions against them. ‘Enforcement action framework in respect of statutory auditors (SAs) for lapses in the statutory audit of commercial banks’ implemented. The central banking institution warned that any SA not following instructions will be met with punitive actions such as debarring them from conducting business with banks. The graded enforcement action framework to enable appropriate action by the RBI in respect of the banks’ SAs for any lapses observed in conducting a bank’s statutory audit. The framework would cover, inter alia, instances of divergence identified in asset classification and provisioning during the RBI inspection vis-à-vis the audited financial statements of banks above the threshold specified in the RBI circular DBR.BP.BC.No.63 /21.04.018 /2016-17 dated April 18, 2017. RBI circular covered the following Types of the lapses on the part of the SAs that would be considered for invoking the enforcement framework would, illustratively, cover the following areas:

a) Lapses in carrying out audit assignments resulting in a misstatement of a bank’s financial statements;

b) Wrong certifications were given by the auditors with respect to the list of certifications as advised by the RBI to banks;

c) Wrong information given in the Long Form Audit Report (LFAR);

d) Issues related to misconduct by auditors in respect of their bank audit assignments; and

e) Any other violations/lapses vis-à-vis the RBI’s directions/guidelines regarding the role and responsibilities of the SAs in relation to banks.

The quantum of enforcement action shall be determined based on the materialist of lapses / violations by audit firms. Lapses/violations that are determined to be not material enough would lead to the issuance of a Cautionary Advice to the audit firm. In case of a violation determined to be material, the enforcement action could be the RBI not approving the audit firm for undertaking statutory audit assignments of banks for such periods as may be decided by the RBI. Earlier in April 2018, With the Reserve Bank of India (RBI) cracked the whip on bad loans menace; more than three dozen chartered accountants were put under the scanner for allegedly conniving with promoters in defaulting as well as restructuring the stressed assets. RBI has started looking into the role of around 35 to 40 chartered accountants in loan defaults by various companies. It was to ascertain whether these chartered accountants helped the entities in any illegal manner causing deliberate defaults and subsequently assisting them in restructuring the dud assets.

e. 2018 SEBI attempted to catch auditors

SEBI proposes new rules to penalise auditors: The Securities and Exchange Board of India (SEBI) has proposed new rules to allow it to take direct action against auditors. The rules provide for expanded duties by such persons and empower the capital market regulator to levy penalties on them and prosecute them. The Bombay High Court in 2010, had affirmed that the SEBI had powers to debar auditors where they have been found directly complicit in the corporate fraud. However, the proposed rules expand SEBI’s powers even in cases where the auditor is not so complicit in the fraud. The regulator could now act even in cases of negligence, in cases where auditors submit materially untrue reports, among other scenarios. SEBI could, therefore, become another regulator that can penalise auditors. The rules refer to Auditors as ‘fiduciaries’.

ICAI Stand on SEBI Consultative Paper: ICAI President Message Sep 2018: SEBI had issued a consultative paper on the proposed SEBI (Fiduciaries in the Securities Market) (Amendment) Regulations seeking public comments, wherein Chartered Accountants have been included in the definition of fiduciaries along with other professionals. In this regard, ICAI has submitted its suggestions and stated that the proposed Consultative Paper issued by SEBI goes beyond the powers of SEBI and there is no specific statutory provision under the SEBI Act conferring powers on SEBI to take action against auditors of listed companies. It has also been highlighted that the apex court of North Carolina (of USA) has decided that auditors/ accountants are not part of fiduciaries. Therefore, the Consultative Paper should not include the Chartered Accountants as fiduciaries.

f. 2018 National financial regulating Authority

The establishment of NFRA is as per section 132 it’s been five years since the enactment of the Companies Act, 2013 . The same has been notified after the Nirav Modi episode. Most notable pending notifications amongst them were the provision to create a National Financial Regulatory Authority – an audit super-regulator of sorts.

Powers of the NFRA: The National Financial Reporting Authority shall—

(A) have the power to investigate, either suo-moto or on a reference made to it by the Central Government, for such class of bodies corporate or persons, in such manner as may be prescribed into the matters of professional or other misconduct committed by any member or firm of chartered accountants, registered under the Chartered Accountants Act, 1949: Provided that no other institute or body shall initiate or continue any proceedings in such matters of misconduct where the National Financial Reporting Authority has initiated an investigation under this section;

(B) have the same powers as are vested in a civil court under the Code of Civil Procedure, 1908, while trying a suit, in respect of the following matters, namely:—

(i) Discovery and production of books of account and other documents, at such place and at such time as may be specified by the National Financial Reporting Authority;

(ii) Summoning and enforcing the attendance of persons and examining them on oath;

(iii) Inspection of any books, registers and other documents of any person referred to in clause (b) at any place;

(iv) Issuing commissions for examination of witnesses or documents;

Punishments & penalties under NFRA: Where professional or other misconduct is proved against any member or firm, NFRA shall have the power to make order for—

(A) Imposing penalty of—

(I) Not less than one lakh rupees, but which may extend to five times of the fees received, in case of individuals; and

(II) Not less than ten lakh rupees, but which may extend to ten times of the fees received, in case of firms;

(B) debarring the member or the firm from engaging himself or itself from practice as member of the Institute of Chartered Accountant of India referred to in clause (e) of sub-section (1) of section 2 of the Chartered Accountants Act, 1949 for a minimum period of six months or for such higher period not exceeding ten years as may be decided by the National Financial Reporting Authority.

The Accountability of the leaders of profession

Who is accountable to all such development? The regulator ICAI council was in their offices during the last five years, all through there was no resistance from the council or its office bearers; everyone at council is mum about such developments. For many years, the chartered accountants have put their best steps to march as partners to national building but some where they have lost their glory, their image, their status, their high head because of those who have ignored the interests of fraternity but worked for their own glory. We should insist on a new set of our leaders who can lead the profession with dedication and should take their Alma Mater into new heights.

(About the Author– Author was Member of ICAI- Capacity Building Committee 2010-11 and ICAI- Committee For Direct Taxes 2011-12 and can be reached at email amresh_vashisht@yahoo.com or on phone Phone: 0121-2661946. Cell: 9837515432 having office at 115, Chappel Street, Meerut Cantt, UP, INDIA)