The Institute of Chartered Accountants of India
(ICAI) is recommending a revamp of the auditor appointment system for
banks, both for central statutory and branch-level audits, its new
President, M Devaraja Reddy, said.
Reddy, who assumed office on Friday after emerging victorious in the
institute’s intensely fought
annual elections, said the current system,
wherein the management of a bank directly selects and appoints the
auditor from a list provided by the Reserve Bank of India (RBI), could
have indirectly caused the current non-performing assets (NPAs) crisis.
NPAs reported by public sector banks have ballooned after RBI tightened
provisioning norms in December. According to a recent news report in The
Indian Express, 29 state-owned banks wrote off a total of Rs 1.14 lakh
crore of bad debt between financial years 2013 and 2015, much more than
they had done in the preceding nine years.
“There is a concern that independence of auditors is eroding. It is a
delicate issue. Everybody is not virtuous,” Reddy said. A fellow member
of the institute, Reddy has 28 years’ professional experience and has
held several positions in the ICAI hierarchy. He was vice-president for
2015-16.
The Hyderabad-based chartered accountant said ICAI was recommending the
formation of a panel with representatives from RBI, the Comptroller and
Auditor General of India, Indian Banks Association and the institute.
According to him, such a committee would be in a better position to
assess which auditor would suit which bank, going into the capabilities
of the auditor and size and complexity of the task involved. “This will
improve the quality of audit. We are expecting a positive response from
the government,” Reddy said.
On the recent proposal by a government-appointed panel on company law
recommending the formation of the National Financial Reporting Authority
(NFRA) as an independent regulatory body for the profession, Reddy
maintained the profession’s stated line that such a body was not
necessary. “The decision (to form NFRA) was taken in a hurry based on
the issue in one company — Satyam.” Reddy said the entire ICAI council
was unanimous in representing to the government that outsiders cannot
judge the work. “A surgery done by a doctor can be assessed only by
another doctor. Similarly, only a singer can appreciate another. Same
for the auditor.”
Reddy was of the opinion that NFRA would only duplicate the QRB (Quality
Review Board) process, which is already available under the ICAI
framework. Yet, Reddy and the newly elected council, which included his
deputy, Nilesh S Nikamsey, would go into what the composition of NFRA
should be, if it becomes a reality. The council would also consider
other recommendations of the panel such as rotation of auditors.
Acknowledging that the trust in the profession had taken a beating in
recent years, Reddy said restoring trust in the profession among all
stakeholders, including the larger public, would be one of his priority
areas. He plans to introduce a compulsory peer review mechanism, wherein
accounts of listed companies would be scrutinised by peers, once every
three years.
The new ICAI chief admitted that penalties slapped on the errant members
needed a review. At present, the maximum penalty stands at Rs 5 lakh,
an amount levied on Satyam auditors too, apart from other measures. “We
are forming a committee to review the penalty,” Reddy said.
Recalling his humble beginnings in an agriculturist family in Chittoor
district of Andhra Pradesh, Reddy is also conscious of the institute’s
role towards the student community. Under his tenure, the institute is
gearing up to put up the new curriculum for public comments. “The
curriculum is being vetted by the government. We will be putting it up
for public comments in the next few weeks. It will be applicable from
May 2017.”
ICAI would look into playing a more active role in placements of the
students and is gunning for more work in government. Reddy identified
defence and railways as key areas, where the community can make a
significant contribution. “Since independence, we are following a
single-entry system in defence. If CAs are given a role, defence may not
require this much of funds.” He said due to the efforts of Railway
Minister and fellow CA Suresh Prabhu, reforms have started in the Indian
Railways’ finances. A pilot project is currently underway in Ajmer
division, the results of which would be known soon, Reddy said.