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New ICAI chief wants panel for bank audit appointments
February, 13th 2016

The Institute of Chartered Accountants of India (ICAI) is recommending a revamp of the auditor appointment system for banks, both for central statutory and branch-level audits, its new President, M Devaraja Reddy, said.

Reddy, who assumed office on Friday after emerging victorious in the institute’s intensely fought annual elections, said the current system, wherein the management of a bank directly selects and appoints the auditor from a list provided by the Reserve Bank of India (RBI), could have indirectly caused the current non-performing assets (NPAs) crisis.

NPAs reported by public sector banks have ballooned after RBI tightened provisioning norms in December. According to a recent news report in The Indian Express, 29 state-owned banks wrote off a total of Rs 1.14 lakh crore of bad debt between financial years 2013 and 2015, much more than they had done in the preceding nine years.

“There is a concern that independence of auditors is eroding. It is a delicate issue. Everybody is not virtuous,” Reddy said. A fellow member of the institute, Reddy has 28 years’ professional experience and has held several positions in the ICAI hierarchy. He was vice-president for 2015-16.

The Hyderabad-based chartered accountant said ICAI was recommending the formation of a panel with representatives from RBI, the Comptroller and Auditor General of India, Indian Banks Association and the institute. According to him, such a committee would be in a better position to assess which auditor would suit which bank, going into the capabilities of the auditor and size and complexity of the task involved. “This will improve the quality of audit. We are expecting a positive response from the government,” Reddy said.

On the recent proposal by a government-appointed panel on company law recommending the formation of the National Financial Reporting Authority (NFRA) as an independent regulatory body for the profession, Reddy maintained the profession’s stated line that such a body was not necessary. “The decision (to form NFRA) was taken in a hurry based on the issue in one company — Satyam.” Reddy said the entire ICAI council was unanimous in representing to the government that outsiders cannot judge the work. “A surgery done by a doctor can be assessed only by another doctor. Similarly, only a singer can appreciate another. Same for the auditor.”
Reddy was of the opinion that NFRA would only duplicate the QRB (Quality Review Board) process, which is already available under the ICAI framework. Yet, Reddy and the newly elected council, which included his deputy, Nilesh S Nikamsey, would go into what the composition of NFRA should be, if it becomes a reality. The council would also consider other recommendations of the panel such as rotation of auditors.

Acknowledging that the trust in the profession had taken a beating in recent years, Reddy said restoring trust in the profession among all stakeholders, including the larger public, would be one of his priority areas. He plans to introduce a compulsory peer review mechanism, wherein accounts of listed companies would be scrutinised by peers, once every three years.

The new ICAI chief admitted that penalties slapped on the errant members needed a review. At present, the maximum penalty stands at Rs 5 lakh, an amount levied on Satyam auditors too, apart from other measures. “We are forming a committee to review the penalty,” Reddy said.

Recalling his humble beginnings in an agriculturist family in Chittoor district of Andhra Pradesh, Reddy is also conscious of the institute’s role towards the student community. Under his tenure, the institute is gearing up to put up the new curriculum for public comments. “The curriculum is being vetted by the government. We will be putting it up for public comments in the next few weeks. It will be applicable from May 2017.”

ICAI would look into playing a more active role in placements of the students and is gunning for more work in government. Reddy identified defence and railways as key areas, where the community can make a significant contribution. “Since independence, we are following a single-entry system in defence. If CAs are given a role, defence may not require this much of funds.” He said due to the efforts of Railway Minister and fellow CA Suresh Prabhu’s efforts, reforms have started in the Indian Railways’ finances. A pilot project is currently underway in Ajmer division, the results of which would be known soon, Reddy said.

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