MCA plans to amend CA Act to remove conflict of interest in audits

The Ministry of Corporate Affairs is planning to amend the Chartered Accountants Act to build disciplinary mechanisms for removing possible conflicts of interest between audit firms and companies they audit.

The government is also looking at ways to address the gaps in the law with respect to network entities of which audit firms are part.
“We need to strengthen the Chartered Accountants Act. Many entities need to be brought within the regulatory remit to create accountability and transparency,” a senior government official told Business Standard.

Determining whether an auditor is independent under current laws, experts say, is difficult because audit firms as part of a network provide services across jurisdictions.

As a result, the same network could be providing audit and non-audit services to a client, which can lead to conflicts of interest and mar the sanctity of the audit. While affiliate audit firms of the Big Four — KPMG, EY, PwC, and Deloitte — come within the purview of the Chartered Accountants Act, the government is discussing legal ways to establish network liability for the larger network firms and non-audit services provided by them. 

The official said the Big Four were likely to be brought within the purview of the Act. Many firms are doing audit as a surrogate business and no one has asked any questions, the official added.

The government, in creating disciplinary mechanisms, could consider bringing in disclosure norms for auditors with respect to
non-audit services and fees charged by them.

The Companies Act, 2013, provides an exhaustive list of prohibited non-audit services. This was done based on the recommendations of the committee headed by Naresh Chandra and in reaction to the Enron scandal. 

“Auditors are watchdogs and hold positions of trust. If they are hand-in-glove with companies, they breach that trust with the shareholder,” said a senior analyst. 

In the European Union, Australia, and the UK, auditors are not allowed to provide non-audit services like taxation, restructuring, and valuation to protect the objectivity of the audit.

India, in accordance with current rules, allows auditors to give these services.

According to the findings and recommendations of a committee of experts on regulating audit firms and networks, there is a need to revisit the list of such services, keeping in view those that can result in conflicts of interest.

The committee has suggested empowering by law the National Financial Reporting Authority (NFRA) to impose civil liabilities on international networks if audit failures or frauds happen because of their methodology.

The Ministry of Corporate Affairs constituted the NFRA in October last year for making recommendations to the central government on the formulation and laying down of accounting and auditing policies and standards for adoption by companies. 

While the NFRA has the powers to examine the auditor and audit firm, its jurisdiction is largely limited to listed companies. This is also a reason why the government wants to give more teeth to the Chartered Accountants Act.

The Serious Fraud Investigation Office, under the ministry, has questioned the role of auditors, particularly BSR Co. and Deloitte Haskins & Sells, in recent scams.

Deloitte recently moved the Bombay High Court, challenging the constitutional validity of the central government’s petition in the National Company Law Tribunal, seeking the removal of the former auditors to Infrastructure Leasing & Financial Services.

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