Right Move to Strengthen Corporate Governance : Daily Current Affairs

Relevance: GS-2: Statutory, Regulatory and various Quasi-Judicial Bodies, Government Policies and Interventions for Development in various sectors and Issues arising out of their Design and Implementation

Key Phrases: Asset Quality Review, National Financial Reporting Authority, Key Managerial Personnel, Serious Fraud Investigation Office, Uday Kotak Committee

Why in News?

  • Recently the Chartered Accountants (CA), the Cost and Works Accountants (CWAI) and the Company Secretaries (CS) (Amendment) Bill, 2021 was passed in Lok Sabha.
  • This Bill amends the Chartered Accountants Act, 1949, the Cost and Works Accountants Act, 1959, and the Company Secretaries Act, 1980.
  • The CA, CWA and CS (Amendment Bill), 2021 seeks to strengthen the accountability of practitioners and firms by making the disciplinary mechanisms more independent, registering firms, and increasing penalties.
  • It reinforces rigor in the entire disciplinary process by entrusting it to non-members of the respective institutes.

Reasons for Bringing this Bill:

  • Recent Failures: The recent instances of failure of the accounting professionals which has put the entire financial system at risk such as in Punjab National Bank fraud, IL&FS fiasco, failure of PMC Bank and the near crisis in YES Bank.
  • Non-Disclosure of Information: Also there were plenty of instances in the financial sector of non-disclosure of material information to stakeholders leading to the RBI introducing asset quality review (AQR) in 2015 to assess the real state of asset quality of banks.
  • Limited Disciplinary Ecosystem: All the three professional qualifications — CA, CWAI, and CS deserve respect and credibility for clearing the stringent examinations. But it becomes difficult for their professional bodies to keep a check on the conduct of independent professionals within the limited disciplinary ecosystem.
  • Increasing Risk Appetite: In a growing economy, when the corporate sector tends to a build risk appetite beyond their capacities, the systemic controls coming through these professionals should be able to ensure stringent implementation of GRC to ensure sustainability of the organizations.
  • Historical Baggage: CA has not kept pace with the changes in India’s economy and society. ICAI was set up in 1949, largely as the Indian version of the U.K. institute. The focus of Indian business back then was how to make money by beating the system rather than improving efficiency and competitiveness. This is presently not sustainable.

Good Corporate Governance in Companies Act, 2013

  • Appointment of Key Managerial Personnel (KMPs): Greater accountability on companies provided including through appointment of (KMPs), role of audit committee(s), independent audit, stricter regulation of related party transactions and restriction on layers of companies.
  • Enhanced Disclosures: are mandated including through board’s report, financial statements as well as filings with Registrar of Companies to ensure that all relevant information is available to investors and regulatory agencies; disclosures in respect of significant beneficial ownership also provided
  • Deposits: Stricter regulation provided with regard to acceptance of deposits by companies.
  • Independence of Auditors: Stringent provisions with regard to independence of auditors provided. Cost audit and secretariat audit provided for specified classes of companies.
  • National Financial Reporting Authority: NFRA established to oversee the quality of service of the Accounting and auditing profession and take action against misconduct in certain cases.
  • Independent Directors: The requirements of appointment of Independent directors and woman directors provided for prescribed classes of companies.
  • Stringent enforcement: action through inspection, inquiry and investigation provided so that non compliances are taken seriously and necessary action taken.
  • Serious Fraud Investigation Office: SFIO is recognized in the Companies Act, 2013 with adequate powers including powers to arrest. Term “Fraud” defined and stringent punishment provided thereto.

Uday Kotak Committee on Corporate Governance

  • It was constituted in 2017 under the chairmanship of Uday Kotak
  • Primary objective: Improving standards concerning corporate governance of listed companies in India.
  • It was constituted in 2017 under the chairmanship of Uday Kotak
  • Primary objective: Improving standards concerning corporate governance of listed companies in India.
  • The proposals that were rejected or referred to other agencies were mostly those which infringed on other regulatory territories.

Key Changes Proposed in the Bill are:

  • Discipline:
    • ICAI’s disciplinary committee and board of discipline will be chaired by non-chartered accountants (CA), and its elected council members will no longer be in a majority in them.
    • It also provides for time-bound disposal of cases against members of the
  • Governance and administration:
    • The term of the ICAI’s Council will be raised from three to four years
    • The maximum number of consecutive terms for its elected members will be reduced to two from the current three;
    • ICAI’s Secretary will replace the ICAI’s president as its chief executive and perform the functions to be specified;
    • ICAI will appoint its auditor from the Comptroller and Auditor-General of India’s panel of CA firms;
  • Coordination Committee
    • The Bill provides for setting up a Coordination Committee headed by the Secretary of the Ministry of Corporate Affairs.
    • Its functions will include:
      1. Quality improvement of academics,
      2. Coordinating and collaborating among the professions, and
      3. Making recommendations on regulatory policies for the professions.
  • Registration of Firms:
    • Firms must now register with the Institutes. The Councils must maintain a register of firms containing details including pendency of any actionable complaint or imposition of penalty.
  • Penalties:
    • ICAI’s disciplinary committee and board of discipline will be chaired by non-chartered accountants (CA), and its elected council members will no longer be in a majority in them If a partner or owner of a firm is repeatedly found guilty of misconduct during last five years, disciplinary action can be taken against the firm.

Criticism:

  • Limiting Role: The proposed changes in the composition of the ICAI’s disciplinary arms will further limit its role. As a result, the ICAI will be effectively reduced to an examination board.
  • Headed by person having lack of domain knowledge: The Bill aims at bringing discipline to these professions but the disciplinary authority will be headed by a non-Chartered Accountant who may lack domain knowledge.
    • For Bar Council, the chairman is a lawyer. For Medical Council, chairman is a doctor, but for ICAI committee, chairman will be a non-CA.
  • Conflict of Interest: The Statement of Objects and Reasons of the Bill states that it seeks to address the conflict of interest between the administrative and disciplinary arms of the Institutes.
    • To achieve this, the Bill proposes to change the composition of the two disciplinary entities to allow for more external representation.
    • However, these external members will be selected from a panel of persons prepared by the three Councils.
  • Redundancy: As the three Institutes also have committees for coordinating among themselves, it is unclear as to why there is a need to setup another Coordination Council as proposed under the Bill.

Way Forward:

  • As these 3 institutes (Chartered Accountants, Cost Accountants and Company Secretaries) together constitute an integral part of Corporate Governance and financial monitoring across the country. Therefore, effective co-ordination between three Institutes is the need of the hour.
  • The Parliamentary Committee has suggested starting Indian Institutes of Accounting (IIAs) on the lines of IIT/IIM. They will offer a course based on accounting, auditing etc., ending ICAI’s monopoly over certification. IIAs can greatly enhance the quality of education with a wholesome curriculum.

Sources: Indian Express  The Hindu BL

Mains Question:

Q. Recently the Lok sabha has passes the CA, CWA and CS (Amendment Bill), in this context critically analyze the said bill along with the need for such a law also mention how it will help in increasing Corporate Governance?