As the noise on level playing field, rotation, advertising and fair competition is rising, the real issue is being brushed under the oriental rug — the regulations of the Institute of Chartered Accountants of India (ICAI) has remained unaltered, although the world around us has completely changed. The Rip Van Winkle that has now woken up after years of slumber is ICAI’s Code of Ethics (CoE). Here is a sampler: a CA firm cannot advertise or solicit business.
In the days of 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. But even today, if a CA firm does compete for an information technology assignment with an EDS or an IBM or a Satyam, it cannot market itself or “solicit” business. Though the ICAI’s CoE has evolved from the days when members played only bridge to boxing, it appears that they must go to the boxing ring with their hands tied behind their backs.
The mandarins of Indraprastha Marg, responsible for this lack of playing field, 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. In a proposal, the Council has passed — with a slender majority of one and with several members abstaining — that the CoE will be amended to introduce rotation of auditors. Apparently, the CoE will be amended to make it a professional misconduct, if an auditor does not rotate out of a client, say, every two years. Imagine the All India Medical Association inserting a regulation that a doctor must rotate out of a patient every two years. Can the Bar Association do the same? Does the customer have the right to choose? Does Parliament have the 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. In fact, it has actually been an unmitigated disaster. If the ICAI believes that rotation is a good idea, it should approach the government with a proposal to change the law. Parliament will debate the proposed legislation and investors opinions heard.
Equally troubling is the current process of disciplinary action against members. 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. The concept of electing the judiciary is worrying as it will be very difficult for an elected politician to take stern action against members of his own constituency, particularly against those who belong to his own party. On the other hand, if I am such a person and a case comes before me asking for the conviction of a member of a rival party, I would have to be a saint to be objective.
The current ICAI president has said that he has written to the Department of Company Affairs to curb the consultancy and audit activities of the Big Four global audit firms (PricewaterhouseCoopers, Ernst & Young, KPMG and Delloitte) in India, “although he does not have any hard evidence”. By this, he has declared his bias in public and has therefore forfeited his right to preside over any disciplinary proceedings concerning them. Even if he claims to be completely fair and objective, the world will say otherwise. Once you have publicly declared your bias against one team you cannot be the 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!!
There is a new answer. 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 “Prominent 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 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 could play a crucial role in such a quasi-judicial board. That would be a new answer to an old question.
The writer is managing director, PricewaterhouseCoopers. The views expressed here are personal.
The article was previously published in Financial Express. Copyright 2003 Indian Express. All rights reserved. Reprinted with permission.