On Dec. 17, 2021, the government introduced a bill in the Lok Sabha to amend the law regulating chartered accountants (and cost accountants and company secretaries). The following table presents the key changes in the Chartered Accountants Act, 1949.
Currently, the Institute of Chartered Accountants of India has powers to discipline chartered accountants but not accounting firms. Following the Satyam accounting scandal, the ICAI complained that it was unable to take action against the company’s auditor Price Waterhouse. The proposal to include CA firms addresses this gap.
Currently, the majority of the members of the two in-house disciplinary bodies — the ICAI Council’s disciplinary committee and the board of discipline — come from the Council that manages the institute. There is long-standing criticism that ICAI has been less than effective in punishing errant CAs.
As proposed, with non-CAs chairing these bodies, made up of a majority of non-CAs—that is government nominees, should reduce the council’s influence over them. Outsiders can take a disinterested view of allegations of professional misconduct and bring their rich and diverse experience to the disciplinary process.
Curiously, it is proposed that the government will pick its nominees from panels to be provided by the ICAI. This contradicts the sound reasoning for bringing in outside expertise.It is not clear why the government would need the ICAI’s assistance to select its nominees, when it has the expertise to make appointments to specialised organisations such as the Indian Space Research Organisation, Department of Atomic Energy, and Reserve Bank of India.
Council Members’ Tenure And Term
Currently, ICAI Council members are elected for three years and can have three consecutive terms at the most. Thus, a council member has a maximum of nine uninterrupted years after which there is compulsory cooling-off. The arrangement has reduced the scope for some to entrench themselves.
The proposal increases the tenure to four years but limits the number of consecutive terms to two. As a result, a council member can have a maximum of non-stop eight years. Therefore, there is no significant change in a council member’s duration but the number of times a member has to contest elections is reduced. Elections are a costly affair and frequent elections are a distraction.
It should be noted, however, that these changes by themselves will do nothing to improve the quality of the council.
The council has 32 elected members and eight government nominees. A group of 40 members is unwieldy. There is a need to reduce the number of elected members to say ten and eliminate government nominees, given that the latter are often serving government officers with their regular day jobs that leave them with no time to participate in the council’s meetings.
Governance And Administration
The changes in the roles of the president and secretary are by far the most significant.
The president who is currently the chief executive authority will become the head of the council. The secretary who currently has no clearly defined role will now become the chief executive officer to carry out the administrative functions of the institute to be specified. As a result, the president will be the non-executive head of the council and the secretary will perform the executive functions. This is similar to the separation of the roles of chairman and managing director in corporate boards. The president will have to ensure that the council’s decisions are implemented, so the buck stops there. So far so good.
It is important to protect the secretary’s professional independence in administrative matters since the president and the council will presumably have oversight powers over the secretary.
One way to do this is to require prior approval of the government for the appointment, reappointment, or removal of the secretary. This is already proposed for director (discipline) and joint directors (discipline) who are junior to the secretary. It’s even more important in the case of the secretary. Even better, the government can appoint the secretary.
The proposal to form a coordination committee consisting of the top leadership of the three institutes is interesting. There is some overlap in the work done by CAs, cost accountants, and company secretaries. The curriculums of the three institutes have a great deal of commonality. The institutes may claim to be doing unique stuff, but the corporate world sees these professionals to be substitutes for some tasks. As a result, they often compete for the same kind of work. Also, the formation of multi-disciplinary practices would require common norms for work and discipline. Left to themselves, the institutes are unlikely to cooperate much. The current informal arrangement for coordination has no statutory basis. So the coordination committee chaired by the MCA secretary is a good idea.
Over time, the government can examine the feasibility of merging the three institutes into a single entity that can offer specialised certification for the work to be done. Possibly, the coordination committee is a prelude to a merger.
Regulation And Development
The change in the preamble from regulation of the profession of CAs to regulation and development is fraught. Regulation requires objectivity and distance. Development requires interest and proximity. The two cannot be done by the same body. CAs should take care of their development, while the institute should regulate them.
Financial Reporting And Auditing
The proposal requires the council to appoint an auditor who is on the panel kept by the Comptroller and Auditor General of India. A fundamental principle of auditing is that the auditor should be appointed by an agency independent of the auditee. So the council being the auditee cannot appoint its own auditor. CAs are familiar with the importance of auditor independence. It would be better for the CAG or the MCA to appoint the auditor who should be on regular rotation.
The quality of disclosure in the ICAI’s financial statements should improve. For example, the annual report for 2020-2021 states that the institute’s operations fall under a single segment within the meaning of Accounting Standard 17 Segment Reporting. This is questionable. Members and students are two separate categories of activities with different kinds of revenues, expenses, and risks. It may be that the institute makes a much larger surplus from students than from members. So there should be separate disclosure for the two categories. Given that students don’t earn enough to keep themselves going, they depend on their parents for their living and study expenses. They have a right to know how much the institute is earning from them.As a public interest entity, the institute should adopt Ind AS.
Opportunity For Radical Reform
The proposals are a piecemeal response to concerns that have been raised. In recent years, CAs are increasingly in the news though not always for good reasons. The government should consider bringing about radical reform of the governance of the institute. An independent enquiry should examine the functioning of the council, the role of the president, conflict of interest in their working, curriculum, training and examination, continuing education, discipline, administration, financial management, regulatory capture, and other matters. The changes proposed in the bill are a band-aid solution when major surgery is required.