By Nantoo Banerjee
Prime Minister Narendra Modi will do a great service to the nation if he is able to put in place the National Financial Reporting Authority (NFRA) to rein in the Institute of Chartered Accountants of India (ICAI) for its perceived failure to enforce discipline. The prime minister is clearly upset with chartered accountants’ role in lack of corporate governance and financial misconduct of corrupt politicians, businessman and NGOs. While Companies Act 2013 provided for NFRA as a regulatory agency for audit, accounts and financial reporting, Section 132 of the law has remained on paper as the rules are yet to be notified. It seems some powerful, politically-connected ICAI members ICAI have been able to put the issue in cold storage for the last three years.
However, the issue is now simmering again especially after Prime Minister Narendra Modi publicly criticised ICAI’s disciplinary record last month. The prime minister pointed out that just around 25 auditors had faced action in over a decade while some 1,400 cases were pending. The government is serious about reopening the case for NFRA. The move comes at a time when the Enforcement Directorate (ED) filed a chargesheet against Rajesh Agarwal, RJD Chief Lalu Prasad Yadav’s daughter Misa Bharti’s chartered accountant, in connection with a money laundering case worth Rs 8,000 crore. The income-tax department had seized the properties of the RJD supremo, his daughter Misa Bharti, son-in-law Shailesh Kumar and son Tejashwi Yadav, and charged the four along with Lalu Prasad’s wife Rabri Devi under the Benami Transactions Act 1988. More properties of the family may be attached, as investigations progress. All these transactions would not have been possible without involvements of the family’s CA and also some of the government’s dishonest tax officials.
How trustworthy are accounting professionals? The latest Comptroller and Auditor General (CAG) report on telecom companies raises many questions. The CAG report claimed that six major telecom companies – Reliance Communications, Tata, Airtel, Vodafone, Idea and Aircel – had allegedly understated gross revenue of over Rs 46,000 crore for a period between 2006-07 and 2009-10 and denied the government its share of income which has been estimated at more than Rs 12,400 crore. The federal auditor has calculated the under-reporting of revenue based on actual earnings of the telecoms during the period as reflected in their books. The auditor is also believed to have slammed the department of telecom (DoT) for overlooking the irregularities and misreporting facts. Interestingly, CAG was prevented from auditing these telcos since 2009 when the private service providers moved different courts challenging the mandate of the government’s super auditor.
However, after the Supreme Court finally settled the matter in favour of CAG in April 2014, these companies were compelled to share their accounts for inspection. One may ask if such an irregularity could come to the notice of CAG, how did it escape the trained eyes of the statutory auditors of these companies? Also, how could telcos sit on massive bank liabilities running into a few lakh crores of rupees and yet show profits in their books of accounts and pay large dividends year after year? Bank credit is a committed liability and not a contingent liability.
The nexus between clients and their auditors cum financial and tax consultants is becoming alarmingly common in India for want of a strong regulatory authority that can address the undesirable ‘togetherness’ between CAs and their clients. It is not true that only small auditors or CA firms are prone to such alliance. Even the Big Four international accountancy firms are no exception, locally as well as globally. Many large firms have fallen prey to such nexus. In the US, utility giant Enron collapsed in 2001 and so did its auditors, Arther Andersen, one of Big Five global audit firms then. Andersen was convicted for obstruction of justice by shredding documents relating to Enron scandal. Enron directors and executives, who fraudulently concealed large projects losses, were sentenced to prison. In India, Satyam Computers, once the country’s fourth largest information technology firm, collapsed due to such a nexus, sending its promoters and auditors from PriceWaterhouseCoopers to jail.
The latest case of a defamation suit filed by Sarvesh Mathur, a former chief financial officer (CFO) of the Indian arm of global consultant-auditor PwC, provides another glaring example of a possible nexus. Mathur accused his erstwhile employer of cooking books, evading tax, wilfully breaking several laws and then intimidating, cheating and tarnishing his name when he refused to help cover-up the white-collar crimes. He made these allegations in his complaint before the Chief Judicial Magistrate’s court in Gurugram, Haryana. PwC, however, denied the allegations and said the case filed by ex-employee Mathur was an attempt to mire PwC and its officials on tenuous grounds in litigations.
However, it will be wrong to label most CAs, audit firms and tax consultants as unethical. Rameesh Kailasam, a governance reform and policy expert who also worked closely in areas of fraud detection, says: “there is the fundamental concept of bookkeeping & accounting and there is also creative book cooking & accounting, which refers to practices that follow the letter of standard accounting rules but deviate from the spirit of it and are also known as Innovative or Aggressive accounting besides being called Enronomics.” Top financial accountancy professionals are not against NFRA. The new agency is mandated to advise on issues related to audit and accounting standards and be the regulator for the profession. Rightly, many want regulatory authorities also to rein in law firms, legal professionals, medical professionals and healthcare agencies. Unethical medical practitioners are often in connivance with practising CAs to mint money by evading taxes. For the present, all eyes are on the prime minister as to how he ensures that NFRA takes off soon. (IPA Service)