So who will reform the audit & accounting profession? Who will be India’s Arthur Levitt, the famous SEC boss, who in the 1990s laid bare the corruption in the published audits of leading American companies? Enter the boss of the NFRA, R Sridharan. In this hard hitting interview with the ET, he makes three critical points:
- The ICAI has failed to regulate the profession properly: “Section 132 (Companies Act, 2013) is our Gangotri. Law has to be interpreted after first understanding the mischief it is designed to cure. The mischief here is the utter failure of self-regulation of the audit profession. Self-regulation of the audit profession has been shown to be a failure all over the world. There is just no exception and there is no jurisdiction where self-regulation is accepted. So, one of the basic points of the ICAI was that ‘as far as we’re concerned, we are doing a great job, self-regulation in our case is okay. There’s no reason we should be subject to an independent external audit.” But that is a statement which has to be taken with a pinch of salt.
- Bad drafting of Section 132 of the Companies Act: “Section 132(3), prescribing one chairperson and up to 15 members, with one full-time and part-time members to be decided by the government is an example of both” bad law and of muddle-headed thinking…
- The nature of accounting is changing for companies with valuable intangible assets: “Many of the issues are captured in a book called ‘The End of Accounting’ by Baruch Lev and Feng Gu. So what really is happening is accounting is not really in a position to provide too much information about these companies. Because their strength lies in their intellectual property, in their patents, in the creativity of the people they assemble. None of these things enter into the numbers. So, by looking at the accounts, you won’t get an idea. So, for all these people who invest money in them, the two professors said, not more than 4-5% of the total information comes from the accounting data.”
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