Regulations For CAs In India Are Draconian, Says YH Malegam
YH Malegam, Member, Financial Sector Legislative Reforms Commission (Source: BloombergQuint)

Regulations For CAs In India Are Draconian, Says YH Malegam

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Regulations governing auditors in India are "draconian", veteran chartered accountant YH Malegam said.

His statement came against the backdrop of the government cracking the whip against prominent audit firms with overseas affiliations.

The auditor depends on information disclosed by the company and can be "misguided", and even if some wrongdoing is found, it is necessary to understand whether it is the result of mere negligence or a fraud, he added.

Four agencies can act against auditors, namely, Serious Fraud Investigation Office, National Company Law Tribunal, Institute of Chartered Accountants of India and the newly created National Financial Reporting Authority, Malegam said.

"I think the regulatory provisions in so far as the audit is concerned, to put it in the simplest terms, (are) draconian," he said, delivering the Narayan Verma Memorial Lecture on Friday.

It is only the ICAI's disciplinary action which can determine the extent of wrongdoing, while the NCLT has powers to dismiss an auditor and bar a firm for five years which affects all employees due to the errors of few, he said.

Without naming the big four of the profession which are affiliated to foreign companies and facing the government's wrath following the Infrastructure Leasing & Financial Services Group crisis, he said we must keep it in mind that they employ thousands of people.

Why should all these employees suffer due to the misdeeds of few, he asked, adding that if such action was taken against smaller auditor firms, they would not have the resources to fight legal battles unlike the big four, he said.

He also spoke out against confidential reports by auditors being leaked from the government's side, stating that the losses to corporate clients caused by such leaks have led to threats of lawsuits demanding huge damages.

The Genesis Of The NBFC Crisis

On the non-banking financial companies crisis, Malegam said the genesis lay in demonetisation. The note ban led to a flush of deposits into the system and pulled down deposit rates, forcing high-networth individuals to put the same money in mutual funds, he said.

The mutual funds invested the money in money market instruments to earn higher returns but when the liquidity situation became harder and rates increased, investors began pulling out the money, he said.

Many of the NBFCs dependent on short-term liabilities could not roll-over the same amid rising interest rates, leading to the crisis, Malegam explained. The auditors are concerned with solvency while assessing a company and not liquidity which was strained, he said.

Also read: How Indian Audit Firms Lost Out To The Big 4

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