Need Single Disciplinary Mechanism For Audit Firms, Says Amarjit Chopra
Audit firms in India need to face a single disciplinary mechanism instead of facing the heat from multiple regulatory bodies, Amarjit Chopra, former president of the Institute of Chartered Accountants of India, said after the central bank refused to approve SR Batliboi & Co LLP for carrying out statutory audits of commercial banks for a year.
“SEBI (Securities Exchange Board of India) in one of the cases debarred PwC, now the RBI is doing here, (National Financial Reporting Authority) is there, the NCLT (National Company Law Tribunal) might also do in certain cases, MCA (Ministry of Corporate Affairs) may do in certain cases, etc. That’s what worries me,” he told BloombergQuint during a conversation.
The Reserve Bank of India, in a statement yesterday, said it found certain lapses in an audit assignment carried out by the EY firm. The action stemmed from the special enforcement framework the RBI announced in June 2018 to take action against firms found to be lacking in their duties as statutory auditors.
In this case, the RBI has already taken action against the firm but will also have to take action against the individual member, Chopra said. Even the NFRA may have to start proceedings against the individual, he said. “That’s a cause of worry to me because there should be only one disciplinary mechanism for any professional institution.”
Chopra also highlighted the need for a more balanced disciplinary action. “Year after year after the auditors have completed their work, banks have been inspected by the RBI’s inspectors. What action will the RBI take against its own inspectors who failed to detect these deficiencies in the earlier years.”
SR Batliboi is the statutory auditor to private lenders HDFC Bank Ltd., IndusInd Bank Ltd., Kotak Mahindra Bank Ltd., Bandhan Bank Ltd. and The South Indian Bank Ltd.
Watch the full video here:
Here are the edited excerpts of the interview:
What have you made of the verdict that came out yesterday?
I have a very mixed feeling. The RBI has debarred SR Batliboi. It is a good thing because if at all someone has been found wanting in performance of professional duties then it probably requires to be done. My mixed feeling comes from how many disciplinary mechanisms the auditory firms should be facing. SEBI in one of the cases barred PwC, now RBI is doing here, NFRA is there, NCLT might also do in certain cases. That is what worries me.
The problem is the CA Act has not permitted action against the firms. We wrote to the government at different point of time that we want to act against the firms too. But we can act only against members. My worry stems from the fact that once SR Batliboi has been debarred by the RBI, the institute has to also take action against the member concerned because it becomes public information, it is in the public domain. It is known to everybody that SR Batliboi has been debarred by the RBI. Now the institute has to start its proceedings or even the NFRA might start its proceedings against the members concerned. That is a cause of worry to me as there should be one disciplinary mechanism for any professional institution.
Do you think it sets precedence? It could be a dangerous precedent or timely precedent or precedent which some people might laud. But what happens in future regarding similar cases?
This definitely sets the precedence, there is no doubt about it.
I want to raise a much bigger issue. This bank has not been inspected for the first time. This bank has been inspected even in earlier years. Years after years after the auditors have completed their work, banks have been inspected by the RBI’s inspectors. What action will the RBI take against its own inspectors who failed to detect these deficiencies in the earlier years.
This is going to trigger another point that even in the public sector banks where the banks have been audited by the non ‘big-four’ firms, similar actions may follow. I don’t mind the actions being followed but then the same principle must apply to the RBI inspector also.
If you really ask me, the RBI itself has been granting exemptions in specific cases, not following the norms. What do we say about that? After all when we talk about financial disciple, everyone knows what is happening in mudra loans and certain other loans. What kind of financial discipline have we been able to set in after all these years?
I don’t mind action against the auditors, but I will like to say that there should be one disciplinary authority and mostly that should be the institute. Now, the NFRA has come in. It means the RBI has gone even above the NFRA. Unanimously, they have gone above the institute. But similar pattern can be followed by SEBI tomorrow. Somebody asks me if SEBI will also take action. Then what SEBI has been doing in all these years?
My worry is when we are trying to discipline one profession, we should be looking at what have we been doing in our own internal inspections. If the RBI take actions against its own inspectors, then I will say the principles of equity has been followed. If it doesn’t act against its own inspectors who conducted all the inspections in earlier years, then I think it is unfair to a particular profession.
When we were talking about this, there where two points. One, nature of verdict and second, quantum of verdict. Is it too harsh a verdict?
Firms have not been debarred in this country earlier. PwC was debarred by SEBI but that order is yet to be implemented for reasons. I know four cases from institutes that we have barred the members for lifetime because the Act only permitted to act against our own members and not against the firms.
It is not that the punishment is too harsh. If the financial statements were falsified or were not reflecting to true and fair view, I can’t say how many people lost money in stock market in those particular years. I will not say that the punishment is too harsh for that matter. But debarring a firm from one audit should also then trigger debarring of this particular firm by SEBI too. After all, if the person is guilty or a firm is guilty of misconduct then it is guilty in all other fields and why only for the RBI. If that happens then it will become too harsh.