Is ICAI overstepping its jurisdiction in seeking to question SBI?

The Institute of Chartered Accountants of India wants an explanation from the State Bank of India on the huge profit erosion in the March quarter, while it turns a blind eye to complicity of its members in cases of financial indiscipline

"SBI faces queries from the Institute of Chartered Accountants of India", read the headline in a newspaper a couple of days ago. The news report went on to say that "Taking a strong note of the SBI's huge profit erosion for the March quarter, due to a rise in the provisions, the president of the accounting regulator ICAI on Friday said it will ask the country's largest bank to explain the reasons for earmarking the higher provisions for bad loans." Does this make any sense?

ICAI, the Institute of Chartered Accountants of India, which ought to be the regulator for chartered accountants and auditors, has chosen to put its foot in its mouth, and it should explain under which provisions of either the Chartered Accountants Act or the Banking Act it is authorised to raise queries of this nature with any bank in the country, and in this case the largest one at that.

There already exists another regulator, the Reserve Bank of India (RBI), which is empowered under the RBI Act to regulate, direct and question the banking sector in India, as well as the statutory and branch auditors and chartered accountant directors that are appointed on the boards of banks. Additionally, the appointment of the chairman and managing director for public sector banks, as well as the other banks, requires its nod.

Frankly, the ICAI has put its foot in its mouth. It has no jurisdiction over the banks at all. Even morally, it has no business whatsoever to raise questions about the State Bank of India (SBI) and its accounting now, when it has miserably failed in acting in another matter of the Global Trust Bank, where the blacklisted auditor firm, PriceWaterhouseCoopers (PwC), was reinstated on the RBI panel after the deputy governor retired, ostensibly with the ICAI's active connivance. The PwC's partner was the chairman of ICAI's Ethics Committee, now charged in the Satyam fraud!

Bad loans and non-performing assets simply do not occur overnight. They incubate over the years, when all signs of incipient or impending illness are winked at, at all levels. The provisioning is carried out at the highest levels going right up to the board of directors, which includes chartered accountants.

The banking sector has a plethora of checks and balances, like periodical submission of stock and receivable statements, reviews at each renewal, internal inspection and stock audit by chartered accountants, and more. If, after all this, the advance turns bad, it goes to prove that there has been definite failure of monitoring and reporting and that it was winked at, at the top too.

The cash-for-loans scam had the active involvement of a director who was a chartered accountant. The auditors are additionally required to submit a detailed Long Form Audit Report (LFAR), aptly renamed "Lafda Report" in Mumbai lingo. How the loans got past all these scrutinizes, at various stages, over the years, needs to be specifically inquired into. The auditors need to clarify whether they have reported on SBI and ICICI Bank exceeding the lending limits to RIL, BHEL and ONGC.

The ICAI ought to issue notices to its members, chartered accountant bank directors, statutory and branch auditors, inspection and stock auditors, those who prepare project reports and those who arrange loans, each of whom is guilty at some point in time, and not the banks who are answerable to the RBI, their regulator.

It has now been proved by these massive provisions being made recently that banks in India have been hiding huge losses on account of non-performing assets (NPAs) year after year. Why they were not provided for in earlier years needs to be explained also by the earlier auditors, in particular, who are equally guilty of dereliction of duty and passive connivance.

SBI's chairman and managing director Pratip Chaudhuri, Bank of India's Alok Misra, Bank of Baroda's AK Khandewal blowing the whistle has reportedly not been appreciated by the banking regulator. Deputy governor KC Chakrabarty, himself a former chairman and managing director of a public sector bank, has indeed been candid in his observation that financial reporting should not be "as per the minds of bank chairmen, when chairman changes, profits tend to fall. Things should not turn topsy-turvy if bank chairman changes."  That bank auditors are hand in glove with the chairman and managing director is the cause of scams, cash-against-loans, corrupt percentage practices, financial jugglery, political pulls and pressures, as has been the case with the Maharashtra State Cooperative Bank.

While the justice system in the US has been swift, prompt and unsparing, like Arthur Andersen paying for the Enron mess, the auditors Ernst & Young being held more responsible for the collapse of Lehman Brothers than the bank's management, and PwC USA being ordered to pay millions in the Satyam affair, our regulators, whether it is the Securities and Exchange Board of India, the RBI or the ICAI, are still mulling over whether each has a cause for action under the law in the Satyam saga.

By questioning SBI and not the chartered accountants involved, the accounting regulator ICAI has turned itself into a laughing stock.

(Nagesh Kini, formerly a practicing chartered accountant-RBI empanelled bank auditor, is now an activist.)

Nagesh KiniFCA
1 decade ago
I fully share Mr. Vaidya's experiences with the ICAI. It has ceased to be an effective Regulator but mired in controversies like sexual harassment, vote booth capturing,still failing to initiate effective action on the GTB and Satyam frauds more particularly even after the SEC in the US has levied heavy penalties on PwC.It terminates small town members but the big fish go scot free.
After being a member of longstanding initially in the industry and subsequently in audit practice besides being on the CAG and RBI audit panels, I first surrendered my COP and even after I had paid my membership fees my membership was terminated as I was not a senior citizen on April Fools Day! There was no response to my protest. Not that I care.
Though I cease to get the Journal I still get mail inviting new members for ICAI courses. Speaks of the inefficiency of a setup that preaches controls, checks and balances to the world at large!.
1 decade ago
I have very bad experience of ICAI in a very simple matter. I have send some emails to ICAI, about 18 months ago. In spite reminders these are not replied so far. Institute prepared a letter ostinsible on 15th Dec, was never mailed for next 15 days or may be it was dated 15th Dec but not prepared on that date. I had replied the letter and sought some explanation, it is simply ignored so far. I am a Chartered Accountant, not holding a CP presently. But for the shortage of space, I could narrate my experience about the request for change of address, and how ICAI kept sending me the magazine to my address in Singapore for months and months, even after I have discontinued my membership on my own, and how they have taken on record that my membership is suspended for non-payment of fees.
1 decade ago
ICAI should have questioned the members first who certified the provisions. ICAI has woken up after RBI brought this out in the open. It is a known fact that Banks do resort to this type of DOOR DRESSING every time there is a change of guard.
CA Karan Batra
1 decade ago
Nagesh Sir, I read your article and appreciate your views.

I agree that ICAI is going beyond its jurisdiction but this may also help ICAI in framing Accounting Standards for Banking Industry
Ca Nagesh Kini
1 decade ago
Nagesh Sir, I read your article and appreciate your views.

I agree that ICAI is going beyond its jurisdiction but this may also help ICAI in framing Accounting Standards for Banking Industry
Free Helpline
Legal Credit