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March 2020

THE MCA CONSULTATION PAPER

By Raman Jokhakar
Editor
Reading Time 4 mins

The MCA paper examining the existing provisions and
seeking to make suitable amendments to enhance Audit Independence and
Accountability has been under discussion. Nineteen pages have laid out a
certain thought pattern and invited comments on questions arising out of that
thought pattern.

Over
the years, regulators, government, the corporate sector and auditors have not
been able to solve fundamental core issues about audit and auditors. Some beat
around the bush, others are infected by vested interests, some import and
impose a model from elsewhere, and so on.

Two
functions describe an auditor – a watchdog (or a sniffer dog if you wish) and a
judge – when he carries out the function of oversight and gives a considered
opinion after taking into account a number of factors respectively.

Looking
at complete independence, it’s not achievable because the client decides the
fees of the auditor for reporting on the client’s financial information.
Independence can only be brought to a level where the auditor’s objectivity is
not affected. Secondly, independence is a personal trait and two auditors under
the same circumstances may act differently.

The
paper bundles the two mammoth topics of Independence and Accountability into 19
pages (four are a reproduction from standards without giving any credit) and
believes that these are the only questions there ought to be. For example, an
auditor of a private non-public interest entity cannot be evaluated by the same
yardsticks as auditors of a public interest entity like IL&FS unless one is
absurdly socialist.

The
paper carries a whiff of ‘we have made up our mind’ when it asks questions
based on its thought pattern, which itself needs questioning. It is piecemeal,
not thought-through, has a flavour of control and seems to aim for a quick fix
without getting to the bottom of the whole problem. While urgency is critical,
not dealing with the root cause will only delay the cure. Such papers call for
‘comments’ but never publish what is received, what is accepted, what is
rejected and why. Therefore, they seem more like a ‘procedural formality’ or
‘consultation in appearance’ rather than an exploration of fundamental
problems. For such an important topic as Independence and Accountability,
the MCA should have a country-wide deliberation directly with 30 to 50 firms,
auditees and regulators rather than sending a questionnaire and seeking answers
to questions that it has framed in its (limited) wisdom.

In spite of the Prime Minister talking of creating the
next big 4 firms out of India, there is literally nothing that is being done
either at the strategic or the tactical level by the MCA. The paper has little
vision to offer on this front when auditors actually vet a large part of India’s
economic interests. The question asked is whether or not auditor groups need to
be essentially and substantially Indian? In fact, the MCA paper mocks this idea
by asking whether there are firms outside of the big four who can even carry
out large audits. If MCA had bothered to add up the loss of value and tagged
each debacle to the auditors at that time, they wouldn’t have asked this
question.

The
paper should have mentioned the need to create an ‘ecosystem’ that will
cultivate and protect objectivity. What should auditors do when they report
what should be reported or when they resign and then the auditee files a legal
case for losing market cap? The MCA has no answers, and no questions either,
about this.

Here is one fundamental issue that the paper avoids:
non-audit fees charged by group / network entities of the audit firms to the
clients in spite of a 30-page-long explicit mention in the NFRA Report 1 / 2019
dated 12th December, 2019. What about non-audit fees taken by audit networks
from group entities of an audit client? Perhaps we have come to a situation
where an auditor will need to give his own related party disclosure to the MCA,
to the Board and even to shareholders!

One can answer the questions in the MCA consultation
paper. But one wonders whether they are complete, whether they target the core
issues and whether an objective exploratory discussion is possible in the
spirit of partnership for nation-building!

 

Raman
Jokhakar

Editor

 

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