Appointment of auditors (Recommendation 2.9)

The Audit Committee of the board of directors shall be the first point of reference regarding the appointment of auditors. To discharge this fiduciary responsibility, the Audit Committee shall:

• discuss the annual work programme with the auditor;

• review the independence of the audit firm in line with Recommendations 2.1, 2.2 and 2.3 above; and recommend to the board, with reasons, either the appointment/re-appointment or removal of the external auditor, along with the annual audit remuneration.

Exceptions to this rule may cover government companies (which follow section 619 of the Companies Act) and scheduled commercial banks (where the RBI has a role to play).

Section 302 of the SOX Act specifies that the CEO and CFO of all listed companies must certify to the SEC regarding the veracity of each annual and quarterly financial report. The Committee examined the management certification issue in detail, and concluded that it constitutes a good corporate governance practice. However, it is not in favour of instituting criminal proceedings in the event of a misstatement. Instead, it felt that there should be significantly enhanced penalties - ones that should act as credible deterrents.

For all listed companies as well as public limited companies whose paid-up capital and free reserves exceeds Rs.10 crore, or turnover exceeds Rs.50 crore, there should be a certification by the CEO (either the Executive Chairman or the Managing Director) and the CFO (whole-time Finance Director or otherwise) which should state that, to the best of their knowledge and belief:

• They, the signing officers, have reviewed the balance sheet and profit and loss account and all its schedules and notes on accounts, as well as the cash flow statements and the Directors' Report. These statements do not contain any material untrue statement or omit any material fact nor do they contain statements that might be misleading.

• These statements together represent a true and fair picture of the financial and operational state of the company, and are in compliance with the existing accounting standards and/or applicable laws/regulations.

  • They, the signing officers, are responsible for establishing and maintaining internal controls which have been designed to ensure that all material information is periodically made known to them; and have evaluated the effectiveness of internal control systems of the company.

  • They, the signing officers, have disclosed to the auditors as well as the Audit Committee deficiencies in the design or operation of internal controls, if any, and what they have done or propose to do to rectify these deficiencies.

  • They, the signing officers, have also disclosed to the auditors as well as the Audit Committee instances of significant fraud, if any, that involves management or employees having a significant role in the company's internal control systems. They, the signing officers, have indicated to the auditors, the Audit Committee and in the notes on accounts, whether or not there were significant changes in internal control and/or of accounting policies during the year under review.

  • In the event of any materially significant misstatements or omissions, the signing officers will return to the company that part of any bonus or incentive- or equity-based compensation which was inflated on account of such errors, as decided by the Audit Committee.

The Committee deliberated long and hard on the issue of whether it was necessary to establish a new, independent Public Oversight Board (POB) for supervising the work of auditors - such as the one proposed in the SOX Act. On balance, the Committee felt that there is no need at this point of time to set up yet another new regulatory oversight body. However, the Committee felt that there is a need to establish an efficient and professional body which can be entrusted to provide transparent and expeditious auditing quality oversight. This will be in the interest of investors, the general public and the professionals themselves. With these considerations in mind, the Committee has recommended the setting up of independent Quality Review Boards.

There should be established, with appropriate legislative support, three independent Quality Review Boards (QRB), one each for the ICAI, the ICSI and ICWAI, to periodically examine and review the quality of audit, secretarial and cost accounting firms, and pass judgement and comments on the quality and sufficiency of systems, infrastructure and practices.

In the interest of realism, the QRBs should, for the initial five years, focus their audit quality reviews to the audit firms, which have conducted the audit for the top 150 listed companies, ranked according to market capitalisation as on 31 March. Depending upon the record of success of such reviews, the DCA may subsequently consider altering the sample size or criterion.

The board shall consist of 11 members, including the chairman. The chairman shall be nominated by the DCA, in consultation with, but not necessarily from, the ICAI. Five members of the board, excluding the chairman, shall be nominated by the DCA who will be people of eminence, professional reputation and integrity including, but not limited to, nominees of the Comptroller and Auditor-General of India, RBI, SEBI, members or office-bearers of the Bombay Stock Exchange or the National Stock Exchange, the three apex trade and industry associations (CII, FICCI and ASSOCHAM), reputed educational and research institutions, bankers, economists, former public officials and business executives. The remaining five members of the Board will be nominated by the Council of the ICAI.

A five-member board, including the chairman.

The chairman shall be nominated by the DCA, in consultation with, but not necessarily from, the ICSI. Two members, excluding the chairman, shall be nominated by the DCA, who will have the same attributes suggested for ICAI's QRB above. The remaining two members will be nominated by the Council of the ICSI.

A five-member board, including the chairman.

The chairman shall be nominated by the DCA, in consultation with, but not necessarily from, the ICWAI. Two members, excluding the chairman, shall be nominated by the DCA, who will have the same attributes suggested for ICAI's QRB above. The remaining two members will be nominated by the Council of the ICWAI.· Funding: Each of these QRBs will be funded by their respective institutes in a manner that will enable it to discharge its functions adequately.

In the instance of a dispute between the findings of the QRBs and reviewees, the matter should be referred to an appropriate appellate forum. This appellate forum should be the same as that suggested for disciplinary matters, which is discussed in Recommendation 3.2 below.

The area of disciplinary mechanism of the audit profession requires careful consideration. According to many who interacted with the Committee, the ICAI, despite best intentions, seems to have been unable to adjudicate disciplinary cases within reasonable time. Similar concerns were expressed about the other two institutions, though the number of cases is fewer in their case.

The problems, according to the Committee, are not those of the law, but of law's delays. Procedures framed under the Chartered Accountants Act have not been able to cope with the changed scenario that must deal with complex businesses and over 70,000 practicing members. The confidence of the investing public and other stakeholders cannot be nurtured unless disciplinary cases are dealt with much more expeditiously and with greater transparency. Accordingly, the Committee recommends an entirely new disciplinary procedure which, while keeping the process within the framework of the existing Acts, will bring about greater independence and speed.

Classification of offences and merging of schedules: At present there are two schedules of offences and misconduct - with the second schedule requiring action by High Courts. These two schedules need to be merged, so that the Council is empowered to award all types of punishment for all types of offences. Further, offences need to be categorised according to the severity of misconduct, so that processes can be designed, and punishments awarded, according to the severity of the offence.·

An independent permanent directorate within the structure of ICAI shall be created, which shall act as the Prosecution Directorate. This office will exclusively deal with all disciplinary cases and, hence, expedite the process of enquiry and decision-making by fully devoting its time and energy towards processing these cases. The office should be headed by a person of the level of Director, and should be one with a legal background and conversant with the provisions of The Chartered Accountants Act and its regulations. He and his office shall be independent of the electoral process of ICAI. Suitable regulations need to be framed to uphold the independence of this office. The Prosecution Directorate shall have the same powers as are vested in a civil court under the Code of Civil Procedure, 1908, regarding (i) the discovery and production of any document; and (ii) receiving evidence on affidavit

1. The complaints received in the appropriate form, manner, and complete in all respects, shall be registered by the Prosecution Directorate, and sent to the member or firm within 15 days of registration of such a complaint.

2. Depending on the category of the complaint, the Prosecution Directorate shall ask for and obtain necessary documents such as written statements, rejoinders, comments, and other evidence from the complainant as well as the respondent. The time frame for this should be, under normal circumstances, no more than 60 days. Not submitting such documents within the prescribed time shall be treated as an offence, risking the initiation of additional obstruction of justice proceedings.

3. On receipt of the relevant documents, the complaint, along with the views, if any, of the Prosecution Directorate, will be placed before the Disciplinary Committee. This has to be done within 20 days of receiving all relevant accompanying documents.

1. Information received shall be examined by the Prosecution Directorate. After forming his views, the Director of the Prosecution Directorate will place the matter before the Secretary of ICAI.

2. If the Secretary agrees with the view expressed by the Director, then the information case will be placed before the Disciplinary Committee.

3. In the event of the Secretary differing with the views of the Director, the matter would be placed before the President of ICAI and, thereafter, it would be discussed at a meeting between the President, Secretary and the Director. If in this meeting, it is decided to refer the matter to the Disciplinary Committee, then reference be made accordingly. Upon such referral, the Prosecution Directorate shall argue the case before the Disciplinary Committee. If, however, the Secretary and President of ICAI decide that the information should be filed and closed, then the Director of the Prosecution Directorate will have the choice to either follow the majority opinion, or dissent and refer such a case to the Disciplinary Committee, with his as well as the Secretary's and President's opinion. In such instances, however, the President shall not function as the Presiding Officer of the Disciplinary Committee. Further, if the Director Prosecution does not feel that a reference to the Disciplinary Committee is warranted, the Institute would still be free to take such cases to the Committee if it feels there is a need to do so. 4. After registering the 'information' case, the procedure outlined for the complaint case may be followed mutatis mutandis.

Enquiries in relation to misconduct of members shall be held by the Disciplinary Committee.

To expedite decision-making, the Council of ICAI shall be empowered to constitute one or more bench of the Disciplinary Committees in cities where there are regional headquarters of ICAI.

Composition:

Each bench should consist of five members. The President or the Vice-President of ICAI will be the Presiding Officer. However, in 'information' cases put before the Committee by the Prosecution Director after disagreeing with the views of the President and the Secretary, the President shall not act as the Presiding Officer. In such cases, the Vice-President will perform this role. Two of the other four members will be nominees of ICAI's Council, while the remaining two will be nominees of the DCA viz. people of eminence, professional reputation and integrity such as, retired judges, bankers, professionals, educationists, economists, business executives, former members of regulatory authorities and former public officials. As far as practicable, members of the Disciplinary Committee should be from the regions other than the one in which it is being constituted. It needs to be stated that in terms of the existing requirement, a nominee of the Central Government is required to be nominated to the Disciplinary Committee. Until very recently, such a nominee was an official of the DCA. However, DCA officials have rarely had the time to attend the meetings of the Disciplinary Committee. Hence, the Committee recommends that, given their pre-occupation in the department, a sitting government official should not be nominated to the Disciplinary Committee.

It is pointed out that for each stage in the process, strict time lines should be prescribed. This is especially important in respect of scrutiny of 'information cases'.

Quorum:: Three of the five members

Tenure:: Co-terminus with the duration of the ICAI Council

Functions: The Disciplinary Committees shall hear the complaint and information cases referred by the Prosecution Directorate and record their decisions and conclusions in a report. This report shall also record the punishment to be awarded, if any, to the member, which can constitute

1. reprimand,

2. removing the name of the member either permanently or for such a period as thought fit,

3. monetary penalty, and/or

4. a combination of any two Council

Any report submitted by the Disciplinary Committee should normally be considered by the Council within 45 days from the date of the report. It shall be the duty of the Council of ICAI to act upon the decisions of the Disciplinary Committee. While performing such a duty, the Council can:

1. Endorse the decisions of the Disciplinary Committee, and implement them.

2. Refer any case back to the Disciplinary Committee for further enquiry, when it finds that certain issues need further enquiry. However, in doing so, the Council will have to frame the specific issues.

3. Direct the Prosecution Directorate to place the case before the Appellate Body, in the event of the Council deciding to appeal against the decisions of the Disciplinary Committee.

Headquartered in New Delhi, the Appellate Body shall consist of a Presiding Officer and four other members. The Presiding Officer shall be a retired judge of the Supreme Court or a retired Chief Justice of a High Court. Two members shall be Past Presidents of ICAI, nominated by the Council. The remaining two shall be persons of eminence nominated by the DCA (but excluding any officer of the Department or member of the Council). The quorum shall be three.

Due publicity shall be given by the Prosecution Directorate about the punishment ultimately awarded, through periodicals, newsletters, website and any other means considered appropriate. However, no decision taken by the Disciplinary Committee be published unless and until the punishment is endorsed and implemented by the Council.

Funding

1. Appellate Body: Required funding arrangements should be made by the Central Government. This is essential for ensuring independence, and on the ground that the High Court stage can be said to have been always funded by the Government.

2. Disciplinary Committee: The expenses shall be borne by ICAI's Council, which shall also fix the emoluments, sitting fees, allowances, and other expenses of the members

3. Prosecution Directorate: All expenses will be borne by the Council of ICAI.

4. Every complaint, other than a complaint made by or on behalf of the Central or any State Government shall be accompanied by a fee Rs.5,000, which will be returned as soon as the Disciplinary Committee recommends that case is not frivolous. Fees not refunded for frivolous cases will be used to partly defray the cost of investigation.

Independent disciplinary mechanisms may be designed along similar lines for the other two Institutes, namely, the Institute of Company Secretaries of India, and the Institute of Cost and Works Accountants of India.