The draft rules for establishing a new body to oversee auditing and accounting standards under the National Financial Regulatory Authority (NFRA) will render the Institute of Chartered Accountants of India (ICAI) ineffective as the new watchdog will require auditors to register with it before taking up auditing work.

It has also prescribed a code of conduct and governing principles for auditors. The regulator will have powers to cancel registration of the auditor in case of a violation.

“Draft NFRA rules prepared by the ministry of corporate affairs propose sweeping powers for the new accounting regulator, likely to render ICAI toothless if passed in present form," said a chartered accountant who did not want to be identified.

The proposed norms, a copy of which has been reviewed by Mint, include registering auditors, recommending accounting and auditing standards, a task which is currently being performed by the self-regulatory body, ICAI.

ICAI will be required to submit recommendations on the “new" accounting standards or for amending the existing standards. NFRA will consider those before presenting them to the corporate affairs ministry for implementation.

NFRA will have power to review, inspect, investigate, oversee the quality of service of professionals and will also cooperate with national and international organizations and regulators to ensure compliance with accounting standards, say the draft norms.

“The rules provide for a clear separation of the regulator from those regulated, since complaints are to be decided by the full-time chairman and members with no role for the ICAI. Therefore, the regulator’s independence will inspire public trust and confidence in its decisions," said R. Narayanaswamy, professor of finance and accounting at Indian Institute of Management, Bangalore.

Auditors of listed companies, public sector banks, government entities will also come under the NFRA. “Those deemed as not “fit and proper" people will not be eligible for registration with NFRA, say the draft rules.

“It is good that NFRA will also regulate the auditors of public sector banks and other government entities. Bank auditors have outrageously failed to detect and report persistent understatement of bad loans and enormous frauds. In fact, NFRA should investigate bank audit quality on priority," said Narayanaswamy.

Separately, on Friday, the Reserve Bank of India, or RBI, issued a circular on graded enforcement action framework for bank auditors for a transparent mechanism to examine accountability of statutory auditors in a consistent manner. In a departure from the earlier stance, Reserve Bank of India (RBI) will hold auditors responsible for asset classification and provisioning divergences observed during RBI inspection. The auditors would be questioned, examined and later penalized if lapses are found.

To instil accountability, NFRA can recommend penal action against auditors if they are found non-compliant or there are lapses in their duties. “If the Authority (NFRA) finds or has reason to believe that any law or professional or other standard has or may have been violated by an auditor, it may decide on the further course of investigation or enforcement action," said the draft norms.

“These steps will compel corporate accountants to adopt responsible accounting and disclosure practices. From now on, auditors will have to assess the costs and risks of accepting large company audits. These include reputational damage, financial penalties and a lifetime ban on auditing, besides criminal penalties," said Narayanaswamy.

Remya Nair in New Delhi contributed to this story.

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