New answers to old questions
An old article published in ET

Accountant: reform thyself !
Roopen Roy – (The author is the Managing Director of PricewaterhouseCoopers Private Ltd. The views expressed are his own and not necessarily those of the company he works for).

“Life is forcing us to find new answers to old questions”

The Prime Minister of India at the inauguration of the 150 years’ celebration of The Bengal Chamber of Commerce and Industries on 16th July 2003

Contrary to popular belief, accounting is a profession which is not the exclusive preserve of the chartered accountants (CAs) or of the Institute of Chartered Accountants of India ( ICAI). There is the Institute of Cost and Works Accountants of India (ICWA). There is also the Institute of Certified Financial Analysts and a host of other bodies. What ICAI has exclusive rights over is the profession of statutory audits. Various statutes in India like the Companies Act 1956 mandate that only a chartered accountant in practice, and no other person, can perform financial audits. CAs, however, have over time diversified into taxation, corporate finance, IT and consulting but these are not areas exclusively reserved for them and the landscape is not monopolistic but fiercely competitive.

However, those members of ICAI who offer these services not exclusive to CAs in the form of a firm of chartered accountants are handicapped by the outmoded regulations that have outlived their relevance. For instance, under the Code of Ethics (COE), a CA firm cannot advertise or solicit business. In the days felt pens, tall desks and bound ledgers, it was not considered ethical or courteous to attract clients of other firms.Business development had not entered the lexicon of the accountants.

Today, even if a CA firm does compete for an IT assignment with EDS or IBM or Satyam, it cannot market itself or “solicit” business. The ICAI ‘s COE was designed when its members played only bridge. Now it can participate in the sport of boxing.But the members must go to the boxing ring with their hands tied behind their backs. Who has created this lack of level playing field? The mandarins who refuse to change with the times. They forget that the mighty dinosaur vanished because it failed to adapt. As the Prime Minister has recently said,” Life is forcing us to find new answers to old questions”. We cannot survive by providing ancient answers to brand new questions.

This is not all. Some regulations are clearly against the consumers’ right to choose and against competition laws. If your company thinks that your established audit firm is overcharging you and you wish to switch to a start up firm which will charge you less, tough luck my dear. The smaller firm can be hauled to the Disciplinary Committee for the violation of the COE for “undercutting”. Is this level playing field ? Suppose there are two grocers in your locality. You buy from one grocer. Now the second vendor comes to you offering a better value proposition. You switch. Enter the Grocers’ Association of India. Imagine that it has a regulation whereby the second vendor can be hauled over the coals by the first vendor as well as the Association for “undercutting”. What do you think our consumer forums and competition authorities will say to this ? Well I know it is a blasphemy to compare auditors with grocers, it hurts the ego and vanity. But I think the consumers cannot be made irrelevant, no matter what. This provision must be given a go by.

There is an even more absurd proposal that the Council has passed with a slender majority of one. It is reported that both the President and Vice-President of the ICAI had voted against this proposal. The proposal is that the COE will be amended to introduce rotation of auditors. How? The proposal is that the COE will be amended to make it a professional misconduct if an audit firm does not rotate out of a client, say, every two years. Can you imagine, the All India Medical Association inserting a regulation that a doctor must rotate out of a patient every two years? Will it be consistent with his Hippocratic oath or to his patient commitment ? Or a lawyer being told by the Bar Association that he must rotate out of his clients every now and then, or else he will be guilty of professional misconduct? Why this provision? Oh, well new members must get an opportunity to get work.

If elections are to be fought, there must be vote-catching issues. And it is fashionable in our country to wield the weapons of quotas and reservations .What about the customer’s right to choose? What about the Parliament’s right to legislate? The Naresh Chandra Committee appointed by the Finance Minster went into this issue, looked at the experience of other countries and came to the conclusion that rotation, wherever adopted, has not furthered the cause of investors .It has actually been an unmitigated disaster.

If the ICAI believes it is a good idea then it should approach the government with a proposal to change the laws. The Indian Parliament will have to debate a proposed legislation. The investors’ voice cannot be ignored in the Parliament.

And to those who do not like healthy and open debates, delegated legislation by stealth is a softer option. Fortunately, the track record of ICAI has been commendable. The vast majority of members do rise above petty politics and do not back these outrageous proposals. And this country has a fair and active judiciary.

The ICAI is a regulatory body not a trade union . Can you image a Steel Manufacturers’ Association, dominated by players with vested interest, by brute majority, trying to ban the branded products of Tata Steel and SAIL. By using specious logic, can a Newspaper Owners’ Association decide which newspaper you will read?

I am also troubled by the current process of disciplinary action against members. When I write this I know I am putting the cat among the pigeons. The ICAI has a self-disciplining mechanism and its quasi-judicial process is conducted by a disciplinary committee which consists of members who are elected. I have no problem with election of the legislature but I am troubled by the concept of election of the judiciary. It will be very difficult for an MP to take stern action against members of its own constituency particularly those who belong to his own party. On the other hand, if I am a MP and a case comes before me praying for conviction of member of a rival party I have to be a mahatma to be objective about my judgement. It is public knowledge that the current President of the ICAI has told the Press that he has written to the DCA to curb the activities of the Big 4.History will say, that by this act itself, he has declared his bias in public and for this reason alone he has forfeited his right to preside over any disciplinary proceedings concerning the Big 4.Even if he claims to be 100% fair and objective, the world will say otherwise. Once you have publicly declared your bias against one team you cannot umpire. Imagine what the Indian cricket team and Saurav Ganguly would say if they were asked to play a match between India and Pakistan with only Pakistani umpires swearing to be fair judges!!

The US has found an answer to this dilemma .We need not copy the US model but we as a nation will completely ignore it at our own peril. Good auditing protects the integrity of the capital market. A handful of black sheep tarnish the image of an honest profession. Instead of culling the entire flock it is necessary the cull the black sheep. In this we must hear the investors’ voice loud and clear -no matter what.

In the US ,following the enactment of the landmark Sarbanes-Oxley Act of 2002, a five-member Public Company Accounting Oversight Board (PCAOB) has been set up.The members of PCAOB have been appointed by the Securities and Exchange Commission (SEC)in consultation with the Federal Reserve Chairman and the Secretary of the Treasury.
The Act requires that all members be full-time and that only two of the five be certified public accountants. In addition, the Act requires that all be: "[P] rominent individuals of integrity and reputation who have a demonstrated commitment to the interests of investors and the public, and an understanding of the responsibilities for and nature of the financial disclosure required of issuers under the securities laws and the obligations of accountants with respect to the preparation and issuance of audit reports with respect to such disclosures."
Investor protection is at the heart of integrity of the capital markets and as the world changes around us, there will be legitimate questions whether the SEBI, investors, Finance Ministry and RBI should watch one scam after another while while the auditors carry on with self-regulation via its elected representatives. India is also known for its independent and vigorous judiciary. Perhaps members of the judiciary may play a crucial role in such a quasi-judicial Board. That would be a new answer to an old question.