Audit firms to be accountable for misdeed of partner

In what could be a governance nightmare for large audit firms, the central government on December 17 introduced a bill in the Lok Sabha to make audit firms responsible for misdeeds of any individual partners.

Introducing the bill, finance minister Nirmala Sitharaman claimed that The Chartered Accountants, the Cost and Works Accountants and the Company Secretaries (Amendment) Bill, 2021, is based on the recommendations of a high level committee constituted by the ministry of corporate affairs. The committee had examined the existing provisions in the acts and the rules and regulations that govern the three institutes with a view recommend measures to strengthen the existing mechanism and ensure speedy disposal of the disciplinary cases.

“Even if a CA ceases to be a member after an alleged misconduct, disciplinary proceedings against her or the firm in which she was partner would not abate. An identical provision is already there with respect to individual members of the institute and not against firms. The amendment makes it impossible for audit firms to escape accountability for misdeeds by any of its partners, even after removing the guilty partners from the firm,” says C V Sajan, partner at Bhudladia & Co., a Delhi-based chartered accountancy firm. “Such a legal provision is from an unfortunate and unkind assumption that all other partners in an audit firm are in complicit with the one who is accused of professional misconduct.”

Meanwhile, the government explains that the current amendments to the Chartered Accountants Act, 1949; the Cost and Works Accountants Act, 1959; and the Company Secretaries Act, 1980, were necessitated due to the changes in the economic and corporate environment in the country, and recent corporate events that put the profession of chartered accountancy under a considerable scrutiny. The stated objectives of the amendment include strengthening of the disciplinary mechanism by augmenting the capacity of the disciplinary directorate to deal with the complaints and information, and providing time-bound disposal of the cases by specifying the time limits for speedy disposal of the cases against members of the Institutes.

Sajan says that the proposed law gives the council of the institute power to initiate disciplinary proceeding against any firm or member suo motu without a formal complaint or information. “Wherever investigation reports are submitted by any government agencies to disciplinary directorate, it would be deemed as a preliminary examination report against the member or firm for the purpose of proceedings. This infers that director-discipline is not required to further examine such investigation reports to ascertain whether any prima-facie case is made out or not,” he explains.

The government also states that the amendment will address the conflict of interest between the administrative and disciplinary arms of the institute, provide for a separate chapter on registration of firms with the respective institutes, enhance accountability and transparency by providing for audit of accounts of the institutes by a firm of chartered accountants to be appointed annually by the council from the panel of auditors maintained by the Comptroller and Auditor General of India (CAG).

The chartered accountants agree that the new composition would pave way for a smoother and uninterrupted functioning of the disciplinary committee and the board of discipline. At the same time they fear that majority of non-CA members in the Committee can pose challenges to litigants when the subject matters in litigation would mostly be analysed with reference to the domain knowledge of chartered accountants and in the process reduce the new composition as a bureaucratic hegemony.

The amendment will also see an increase in the timeframe of temporary removal of name from membership as penalty for some offences from three months to six months. Similarly monetary penalty will be increased to ₹2 lakh from existing ₹1 lakh. Maximum monetary penalty for more serious offences will be ₹10 lakh instead of current ₹5 lakh. A new provision to impose removal of name for an additional period at the discretion of authorities, where there is failure to pay monetary penalty, has also been brought in.

“A new provision has been introduced to prohibit a CA firm from practicing up to two years or to cancel its registration for any period or to impose a penalty maximum up to ₹50 lakh, where a partner or owner has been repeatedly found guilty of misconduct within a period five years. These changes are very harsh. Removal from membership even for one day destroys the life of a CA professional because of the break in membership, which plays crucial in getting future assignments,” Sajan says.

While stronger penalties and punishments will act as a deterrent, it may also dissuade CA professionals from joining together to form bigger audit firms that can match the scale and size of firms affiliated to international firms like PwC, Deliotte, KPMG and the EY.