CA, CS Bill: New Legislation Seeks To Curb Misconduct In Audit And Accounting Profession

The government tabled a bill in parliament during the winter session that aims to strengthen the disciplinary mechanism and speed up disposal of misconduct cases in the audit and accounting industry as the sector faces more scrutiny over corporate wrongdoing.

The Chartered Accountants, the Cost and Works Accountants and the Company Secretaries (Amendment) Bill, 2021 was introduced in Lok Sabha on Dec. 17.

Given the changes in the economic and corporate environment in the country, it has become necessary to amend these acts, Finance Minister Nirmala Sitharaman is quoted as saying in the statement of objects and reasons for the amendments. "Further, recent corporate events have put the profession of chartered accountancy under a considerable scrutiny.”

Sectoral regulators have increased scrutiny as governance issues at companies from Yes Bank Ltd. and Punjab and Maharashtra Cooperative Bank Ltd. to the IL&FS group brought the spotlight on audit practices.

The amendments to the existing laws for chartered accountants, company secretaries and cost accountants are based on the recommendations of a committee constituted by the Ministry of Corporate Affairs.

The Institute of Chartered Accountants of India, in an emailed response to BloombergQuint, said the proposed changes will "result in strengthening the corporate governance and quality of preparation and reporting of key statutory documents".

Here are the key changes that the Chartered Accountants, the Cost and Works Accountants and the Company Secretaries (Amendment) Bill, 2021 proposes:

Registration Of Firms

The amendment proposes that the professional institutes—the Institute of Chartered Accountants of India, the Institute of Cost Accountants of India and the Institute of Company Secretaries of India—register the firms. As of now, they only register members.

The move will grant institutes the power to take disciplinary action against firms as well, apart from their members.

Audit Of Institutes

To enhance transparency and accountability, the annual accounts of three institutes will be audited by a firm of chartered accountants selected from the panel of auditors maintained by the Comptroller and Auditor General of India, according to a proposed amendment.

Under prevailing law, the institutes were not required to pick an auditor from the C&AG panel.

The ICAI, however, said the proposed change is in line with its current practice. "The auditor firms appointed for the audit of accounts of the ICAI are empanelled with the office of C&AG," it said in a statement.

Autonomy To Councils

The proposed amendments also provide for autonomy to the councils of the respective institutes to fix fees and other charges for its members, students and firms by deleting the caps under the prevailing acts. As of now, any change in the fee requires the government’s approval.

The term of the council is also proposed to be increased from three to four years. However, the elected members can be on the council for two consecutive terms of four years as opposed to three (consecutive terms) of three years currently.

This is one of the changes recommended by the institute, the ICAI said.

Increase In Penalties

The new bill also provides for a substantial increase in penalties and period of disqualifications to deter offences.

In case of 'grave offences' listed under the second schedule of the CA Act, the penalty has been increased from Rs 5 lakh to Rs 10 lakh, along with the expulsion for a period an institute deems fit.

The amendments introduced specific timelines for disposal of disciplinary complaints. For instance, the board of discipline will be required to conclude its inquiry within 90 days of receiving a preliminary examination report.

Members Of Disciplinary Committee

The disciplinary committee currently requires two government nominees and three council members. However, the amendments propose to include two chartered accountants and three non-CAs.

The non-CA members, to be recommended by the institute, will include those who have “experience in law and have knowledge of disciplinary matters and the profession".

One of the non-CA members will also be the presiding officer of the bench.

The ICAI, however, said the current practice of three CAs/council members "having domain expertise in accounting, auditing, code of ethics, technical matters of taxation" should be continued.

“This would help to deal with and deliver appropriate justice in disciplinary cases,” the ICAI said in its statement.

The institute has reservation on having a non-CA as the presiding officer as “thorough knowledge of accounting, auditing and ethical standards and experience in practice of at least 15 years is required to arrive at right judgement in a disciplinary case".

“We have recommended that the current practice of having president or vice-president of the ICAI as presiding officer be continued,” it said.

The bill also empowers the disciplinary directorate to conduct suo motu investigation against its members or member firms. Currently, it can only probe if a complaint is filed.