The status of NFRA and ICAI as on date - Revised and Updated

While appreciating the standpoint of many professionals who don't agree with my viewpoints and are unhappy with the fact that NFRA is our disciplinary regulator, if you look at the corporate scams since Satyam very little legal action has been taken against the respective audit firms including scrapping of the law (in the Chartered Accountants Act, 1949) that no action can be taken against any audit firm. Only a member can be punished. This law was enacted more than seventy years back. And it still remains the same. A firm can never be punished.

A lot of soul searching is required from us (Chartered Accountants) to come to the conclusion that whatever has happened so long was right. I'm not going into the details of the cases which all of you know and on which I have written a lot. But what's wrong in having a separate disciplinary regulator?

I would like you to read the Audit Quality Review Reports of NFRA pertaining to BSR & Co., LLP (KPMG) and Deloitte pertaining to IL&FS, and Rajendra K Goel & Co. on Jaiprakash Associates Limited before you come to any conclusion.

The problems lie elsewhere. One important problem is that 5 CAs out of a total of 11 members are sitting in the governing board of NFRA and messing up the entire work that has been done by NFRA since 2018. How can you have 5 CAs sitting in the governing body of the disciplinary regulator? What are they supposed to do? Your guess is as good as mine.

One important eligibility of becoming a NFRA member. All the NFRA members including the chairperson who are in full-time employment cannot be associated with any audit firm (including related consultancy firms) during their term of office and 2 years thereafter.

The ICAI will now have to consult with NFRA and examine its recommendations in this regard. Thus the National Advisory Committee on Accounting Standards is effectively replaced by the NFRA.

The ICAI Central Council constitutes of 40 members of whom 32 are elected by the Chartered Accountants and remaining 8 are nominated by the Central Government generally representing the Comptroller and Auditor General of India, Securities and Exchange Board of India, Ministry of Corporate Affairs, Ministry of Finance and other organisations.

We hope that the new Central Council which will take charge very soon will make effective changes in this regard to the rules and regulations to make them effective and professional and make us accountable to begin with.

Updates as on 21-02-2022

28th September, 2021 - Conduct regulatory impact assessment for accounting standards revision : NFRA tells ICAI

10th October, 2021 - NFRA plans to redraft audit norms for small firms

11th October, 2021 - ICAI, NFRA clash over audit of small firms

27th December, 2021 - Chartered Accountancy Bill : Proposal to have non CAs in ICAI Panel irks fraternity

21st February, 2022 - Statutory auditors may not get large companies’ non-audit operations

These need to be written on very soon.

To be continued

RBI bars Haribhakti & Co. from Audit for two years

 In 2019, the Reserve Bank of India (RBI) had imposed a one-year ban on SR Batliboi & Co, an affiliate of global auditing firm EY, after it found lapses in the audit report of a bank.

RBI has now barred audit firm Haribhakti & Co. from taking up any type of audit assignments for entities regulated by RBI. 

The bar comes into effect from 1st April 2022 and will continue for a period of two years. This will not impact audit assignments taken up by Haribhakti & Co. in RBI-regulated entities for the financial year 2021-22.

This action has been taken on account of the failure on the part of Haribhakti & Co. to comply with a specific direction issued by the RBI with respect to its statutory audit of a systemically important non-banking financial company.

The action has been taken in connection with audit assignments of SREI Group non-bank lenders. 

The RBI superseded the boards of SREI Infrastructure Finance Ltd. and SREI Equipment Finance Ltd. and referred the two companies for insolvency proceedings.

The Kolkata Bench of the National Company Law Tribunal gave its approval to start insolvency proceedings against SREI Infrastructure Finance and its wholly owned subsidiary SREI Equipment Finance.

As per the financial statements issued by Srei Infrastructure Finance Ltd., Haribhakti and Co. were statutory auditors of the company from FY 2015-16 to FY 2019-20. 

As per the annual report for FY 2020-21, D. K. Chhajer & Co., Chartered Accountants, were appointed statutory auditors at the annual general meeting held in September 2020.

The RBI invoked powers under Section 45MAA of the RBI Act to take this action. This is the first time that RBI, the regulator, has taken such an action against an audit firm.

This is the first debarment done since the RBI put in place a framework to take action against erring auditors for lapses during audits in 2018.

The RBI in its circular, titled 'Enforcement action framework in respect of statutory auditors for lapses in statutory audit of commercial banks', had warned that any statutory auditor not following RBI instructions will be met with punitive actions such as debarring them from conducting business with banks.

The new framework aims to improve quality and bring a transparency mechanism to examine accountability of statutory auditors in a consistent manner.

Where any auditor fails to comply with any direction given or order made by RBI under section 45MA, RBI, may, if satisfied, remove or debar the auditor from exercising the duties as auditor of any of RBI regulated entities for a maximum period of three years, at a time.

As on March 6, 2021, SREI Infrastructure Finance owed banks loans worth Rs 11000 cr plus and outstanding bonds and NCDs worth Rs 710 cr plus.

SREI Equipment Finance owed bank loans worth Rs 16,900 cr plus and other debt instruments worth Rs 499 cr plus. All these facilities and instruments were rated ‘D’, or default grade, in March.

Among the larger private banks, Axis Bank Ltd, IndusInd Bank Ltd and RBL Bank Ltd, have listed Haribhakti & Co. as statutory auditors, based on information in their annual reports for FY 2020-21. 

Apart from these three banks, the chartered accounting audit firm has served as auditor for Shriram Transport Finance Ltd and Centrum Capital.

Conclusion

India has been struggling with a shadow lending crisis since 2018 after IL&FS, a leading infrastructure financier, went bankrupt, sending shock waves across banks and other financiers leading eventually to rescues of at least half a dozen lenders.

In August, market regulator Securities and Exchange Board of India (SEBI) empanelled 16 audit firms, including Haribhakti & Co, to conduct forensic audits of listed companies' financial statements as part of its efforts to curb frauds. 

The 16 firms include BDO India, E&Y, Deloitte Touche Tohmatsu India, Chaturvedi & Co, Chokshi & Chokshi LLP, Grant Thornton Bharat LLP, Haribhakti & Co. LLP, KPMG Assurance And Consulting Services LLP, Mukund M Chitale & Co and Protiviti India Member Pvt Ltd, among others.

So, on the one hand, SEBI is empanelling Haribhakti & Co; on the other, RBI has barred the auditing firm from auditing regulated entities. 

This also highlights the lack of communication between the two regulators.

RBI's Message to Auditors

The RBI has given a clear message that it will not tolerate any laxity or non-compliance with its regulatory direction. 

The auditing firms have to set high standards of quality. The instances of defaults or NPA (non-performing assets) recognition is key to the soundness of any financial institution.

Past failures and lessons

The recent failure of large institutions like infra financing institution IL&FS, and new generation private bank YES Bank have shown that the rotation of the auditing firm is a must. 

Both these large institutions had the Big-4 as their auditors. The RBI earlier found YES Bank under-reporting the NPAs in its book. Similarly, there were instances of regulatory lapses in IL&FS, especially inter-company transfers, under-reporting NPAs, etc. In fact, most NPAs were unearthed in the banking sector post the asset quality review (AQR) initiated by the RBI.

Concluded

This case study to be continued

Note - This article was published on LinkedIn on 13th October, 2021