On 5 April 2022, the Indian Parliament, after much debate and deliberation, passed The Chartered Accountants, the Cost & Works Accountants and the Company Secretaries (Amendment) Bill, 2022 (soon to be ‘Act’ subject to the President’s assent).

The Bill seeks to revamp the functioning of three institutes – the Institute of Chartered Accountants of India (ICAI), the Institute of Company Secretaries of India (ICSI) and the Institute of Cost Accountants of India. It aims to usher in an era of transparency and accountability from within the three Institutions.

The Bill has been introduced on the recommendations submitted by a High-Level Standing Committee constituted by the Ministry of Corporate Affairs (MCA). It has been made with an attempt to evolve with the changing corporate environment in the country, with a major overhaul to the disciplinary mechanism.
 

Reason for the Amendments

This Bill was drafted based on the concern that it would facilitate the creating of world-class institutions, comparable to the traditional ‘Big Four’ accounting and auditing firms (EY, Deloitte, PwC, KPMG) that could help meet global demands and foster new talent.

In recent years, India has witnessed numerous frauds, scams, bankruptcies, insolvencies, etc. in the business and banking sector, thereby damaging investor confidence. This has severely disturbed businesses and hampered investments. The current real estate scandals are an example of the same. Also, the likes of Satyam scam, IL&FS default and the Punjab National Bank fraud made the Government think of an affirmative action that may act as a deterrent for such scams in the future, to check their frequencies in the future. Hence, the Government has come up with the changes, aimed at developing a robust corporate regime that is in tune with global investment demands. Additionally, the changes are also expected to address or check the drop in accounting standards and the way audit certificates are handed out to corporations. This is a concerted effort to enhance accountability and transparency in auditing matters by the Central Government.
 

The Amendments

The following are the changes proposed by the Bill.

1. Constitution of Disciplinary Directorate

The biggest change in the Bill is an attempt to strengthen the disciplinary mechanism by providing a Disciplinary Directorate the capacity to take cognizance of complaints against members of the Institutes and provide time-bound and speedy disposal of the same.

Under the Act, previously, upon receiving a compliant, the Director made an opinion on the alleged misconduct and, subsequently, passed it on further to the Board of Discipline or the Disciplinary Committee by exercising their own discretion. The Bill now amends this and empowers the Directorate to independently conduct investigations. A period of 30 days will be provided to determine if the complaint is actionable after it is received. If it is actionable, then a preliminary examination report is to be sent to the Board or the Committee. The Bill has also mandated that no complaint filed with the Directorate can be withdrawn.

2. Constitution of Board of Discipline

Under The Chartered Accountants Act, 1949, The Companies Secretaries Act, 1980, and The   Cost & Works Accountant three Act (hereinafter referred to as ‘the Acts’), each Council must have a Board of Discipline and members of the Board include: (i) Presiding officer (experienced in law and disciplinary matters); (ii) Two members; (iii) Director (Discipline) as secretary. Through the Chartered Accountant Act, 1949, the Central Government nominates one of the two members, while the remaining member is from the Council. For the other two Institutes, both members are nominated from the Institutes.

The Bill amends the timeframe for effective conclusion of matters, while allowing for the constitution of multiple Boards of Discipline. One of the ‘two members’ on the Board will be nominated by the Central Government, the other by the Council.  It also governs procedural rules for the Board, modification of penalties, and empowers the Council to remove names of firms from the Register upon non-payment of penalties imposed under the Bill. Chartered Accountants /Company Secretary (CS)/Cost & Management Accountant (CMA) will now work under the purview of this disciplinary mechanism established by the Bill.

3. Constitution of Disciplinary Committee

Under the Acts, the Councils are mandated to constitute a Disciplinary Committee (DC) consisting of: (i) Presiding Officer – President or Vice-President of the Council; (ii) Two members elected from the Council; and (iii) Two members nominated by the Central Government.
The Bill amends this and provides that the Presiding Officer must not be a member of the institutes but a nomination of the Central Government. The Committee is also mandated to complete its inquiry within 180 days of receiving the preliminary examination report.

4. Rise in Penalty Amount

Under the Acts, in case of misconduct by members, professional or otherwise, a fine of INR 5,00,000 was imposed. The Bill amends this and increases it to INR 10,00,000 which is double the amount mandated by the Acts.

Additionally, in the case of a habitual offender, the Committee may take action against the firm of the said individual by suspending activities related to chartered account, cost accounts, or company secretary. A heavy fine of INR 50,00,000 can also be imposed, in the alternative.

5. Registration of Firms

The Bill mandates that firms must register with the Institutes by making an application to the respective Councils. A register must be maintained by the Councils which contains details regarding pendency of any actionable claim or imposition of penalties/due penalties against the firm.

6. Fee on Registration

The Bill dispenses with the condition of prior approval of the Central Government to determine the fee required for entry of names in the Register of members. The Council is now empowered to decide the required fee with its own discretion.

7. Formation of IIAs

The Bill proposes the establishment of Indian Institutes of Accountancy (IIAs), similar to traditional and historical institutional chains like IITs and IIMs in India. This proposition seeks to create world-class home-grown talent in accountancy sectors, comparable to the ‘Big Four’ firms. It is believed that such institutions will help in dealing with increased global and domestic demand, while creating an altogether new specialized profession and education of accountancy and auditing.
 

Impact: Contradictions and Positive Outcomes

Until the Bill is in force and some time has passed in its implementation, one can only speculate on the potential impact or influence it will have on the industry. An attempt, however, has been made below to discuss the possible ramifications of these changes.

Contradictions

The Central Government clearly attempts to increase ‘external representation’ in the composition of disciplinary groups. However, a contradiction arises in the methodology. These external members will be selected from a panel of candidates prepared by the three Councils, thus negating influence of the Government in choosing a candidate. The Government will, indirectly, continue to rely on the Councils for selecting external members. If the Councils continue to nominate these members, it is unclear how the overlap of administrative and disciplinary matters will be resolved.

Further, while the Bill permits the establishment of multiple Boards of Discipline and Disciplinary Committees, it allows for the nomination of the same persons as ‘Presiding Officers’ or ‘members’ by the Central Government. This will hamper speedy disposal of complaints – the core purpose of the new framework. Appointment of the same set of people across different committees and boards will hamper simultaneous hearing of cases and slow down the dismissal/resolution of cases.

There are apprehensions of government intervention and decision-making autonomy of these Institutions with the introduction of the Bill. The presence of non-professionals has also irked members of the Opposition. The fear is that such non-professionals will examine the books of accounts of firms and head disciplinary matters, without any training and minimal knowledge about how accounting and auditing works. The disciplinary committees formed may have more non-Chartered Accountants than Chartered Accountants, raising questions about adequate knowledge and, therefore, hindering smooth operation of disciplinary proceedings.

Positive Outcomes

The Bill has been proposed to overhaul the disciplinary mechanism, which was necessary due to the poor record of resolving cases of misconduct. None of India’s best accounting practices are in line with international standards and this Bill is an attempt to streamline India with it. Given the number and frequency of scams and frauds by large organizations in the business sector, it is an attempt by the Government to have a hands-on understanding and monitoring of situations, and stand guard.

The three Institutions have been self-regulating organisations (SROs). While SROs always claim that their actions are in line with the general public interest, in practice, it is a different case. A Committee of Experts appointed by the MCA in the past, has observed that self-regulation in professional bodies often leads to conflict of interest with its members. They have to promote their profession and perform their duties while monitoring and regulating their close member-colleagues. Hence, even if members are found guilty, the penalties imposed are not proportionate to the wrongdoing.

The process in the new regime for appointing, re-appointing or removing the Director (Discipline) and Joint Directors (Discipline) has been amended in light of the above. Now, before any of these actions, the respective Council of the Institute has to seek government approval before executing the same. Additionally, by registering firms under their respective Institutions, entire firms can now be prosecuted in case of any wrongdoing such as scams and financial frauds. Previously, as witnessed in the Satyam Scandal, only individual members were held accountable for the wrongdoing, and no prosecution could be made against the firm or the separate corporate entity. This, often in such cases, only a few members have been made scapegoats for a much larger organizational failure. The ability to hold firms accountable, independently, is a welcome development.

Finally, the proposition of setting up of IIAs on the lines of IIMs and IITs will end the statutory certification monopoly of the ICAI. A specialized, five-year, research-driven, full-time degree is targeted in accounting, auditing, and other related areas – with Post-Graduate and PhD options. This is certain to enhance the quality of training and education with a more wholesome curriculum, making the accounting community inclusive and diverse. Therefore, more competition of quality CAs and other accounting related professionals will lead to higher standards of conduct and quality professionalism.
 

Conclusion

To mention a few areas of concern regarding the Bill: (1) Registration and verification of firm names are seen as an unnecessary burden; (2) releasing names of those under disciplinary action before finality of any order or judgement, which will adversely impact businesses. There is a claim to keep the names confidential till the final order. Further, government interference and encroaching on the autonomy of the Institutions are generic concerns that have often come up in discourses.

Nonetheless, the Standing Committee under MCA that provided inputs for the Bill has referred to and studied practices prevailing in the USA, UK, Canada, Australia, South Africa, etc. with an aim to incorporate similar practices in India in order to elevate accounting standards and bring them on par with international levels. The Bill also seeks to eradicate monopolistic and restrictive policies that encourage inefficiency, complacency and corruption. It attempts to enhance accounting and audit quality, while ensuring speedy delivery of justice in disciplinary matters. The overhaul of the disciplinary mechanism, the registration of firms, increase in imposition of penalties, and the suggestion of establishing accounting institutes for education are positive steps to facilitate investor confidence in an emerging economy like India.