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A recent report of the Company Law Committee has made far-reaching recommendations to the government to recategorize specified “criminal compoundable offences" to “civil wrongs", thereby making them subject to civil penalties. Undoubtedly, this is an important measure to address and permit ease of doing business and ease of living. Specifically, it contains provisions to address stringent punishment under the Companies Act for debarment of auditors by the National Company Law Tribunal (NCLT) and National Financial Reporting Authority (NFRA).

The fundamental premise for diluting the empowerment of the NCLT and the NFRA, in so far as debarment of auditors is concerned, is predicted on the following principles; (i) due process of law, (ii) the principle of innocent until proven guilty, (iii) theory of proportionality.

The practice of auditors relying upon management representation and assurances is also up for scrutiny. Does it mean that auditors are expected to sit in judgement on every business decision? The answer to it perhaps translates into a legal standard that there ought to be a degree of personal involvement of the concerned auditor(s) in a corporate fraud, before fastening criminal liability upon them.

We must not forget that the “presumption of innocence", which is a cardinal principle of law, albeit a constitutional canon, equally applies to auditors. Having said that, auditors being gate-keepers and not privy to every action of the management, should not be fastened with criminal charges for a mere failure to report management acts of negligence, which is perhaps too overwhelming and disproportionate. This is where the committee highlights the principle of proportionality and, in my view, constitutional protection against “double jeopardy".

Nonetheless, from a public shareholding perspective, it is only the auditors who are uniquely positioned to identify management misdoings and enforce probity to protect their interest. Therefore, sophistication of business models and complex transactions call for an overhaul of accounting standards.

For purposes of objectivity, policy of materiality, a statutory framework under Sebi laws, assumes significance. For others, auditors must be empowered and held accountable to ensure that the management provides them with complete information. At the same time, auditors can not be permitted to get away with lapses in their professional oversight where the transactions are evidently begotten with falsehood.

The constitutional rights of the auditors are indeed inviolable, but their acts can not be beyond scrutiny. Given the specialised nature of the task, it would be prudent to confer the decision -making power regarding correctness of auditors’ actions solely upon one authority, which is equipped to judge the auditors’ actions. Crucially, the accounting profession is expected to maintain highest standards of integrity and, hence, ordinarily such authority of ICAI for misconduct must be above-board, timely, and not plagued by vested interests. At any rate the power of sovereign is supreme, and can be exercised via NCLT / NFRA, but such empowerment should be exercised in exceptional situations. Clearly, all this entails an overhaul of the regulatory framework to implement standards for individual CAs, their respective organizations and changes in statutory laws.

Mukesh Butani is founder of BMR Legal.

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