Sunday, September 15, 2013

Celebrate the creation of National Financial Reporting Authority

Today I have watched the Bengali movie 'Alik Sukh' based on the novel with the same title authored by Suchitra Bhattacharya.

'Alik Sukh' means 'fleeting happiness'. The protagonist of this film is a well known and very successful gynaecologist. He had failed to reach his patient in time when she was sinking after cesarean delivery causing her death. He was busy in signing an agreement with a real estate developer to buy an apartment to gift  his wife on the occasion of their marriage anniversary. This was the first occasion when his patient died. The protagonist could rationalise the death through intelligent arguments to himself and his wife. His wife was not convinced. She could not make the doctor husband realise that the patient had to die due to his professional negligence in spite of her best efforts. In the climax, the doctor relaised his negligence when his wife needed immediate surgery and the arrival of the anaesthetist was getting delayed exposing his wife to the risk of losing life due to delayed surgery.

Although the story of the movie is about the medical profession, this phenomenon of negation and rationalisation of actions through intelligent arguments is common among professionals of every hue. While this is true, in many occasions, what appears to be a professional negligence to the affected person and non-specialists, is not actually so. Only specialists can rightly evaluate cases which do not involve blatant violation of professional standards. Therefore, most professions are self-regulated. Unfortunately, self-regulation has an important limitation. Professionals are not god. They are human beings. Therefore, they sometime err in judgement in discharging their professional duties.  It is quite possible that those who are assigned the task of deciding a case of professional negligence, at some time or the other, might have rationalised some of their professional negligence. This obscure their objectivity. Moreover, they might be biased in favour of their professional colleague in order to protect the credibility of the profession. Complaints of professional negligence that fall in the grey zone are often decided in favour of the member of the profession. This adversely affects the credibility of the profession. Credibility is also lost as non-specialists perceive bias in almost every judgement which goes in favour of the member because of the real possibility of bias creeping in the decision-making process. The auditing profession is no different.

In recent times, globally, the credibility of the auditing prfoession has taken a beating due to detection of significant number of accounting frauds. India is no different. In USA, the Sarbanes-Oxley Act 2002 created the Public Company Accounting Oversight Board (PCAOB) to restore investors' confidence in the auditing profession. The formation of the National Financial Reporting Authority (NAFRA) under the Companies Act 2013 is also an initiative in the same direction. It should not be viewed as a judgement against the capability of the Institute of Chartered Accountants of India to enforce  professional standards. It is the right initiative by the government to improve the perceived audit quality. Moreover, it addresses the  inherent weakness in the mechanism of self-regulation.  

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