CAs and Industry Have Got the Modi Message. Who Next? asks Sucheta Dalal

Prime minister Narendra Modi’s speech on 1st July, to mark Chartered Accountants (CA) Day, has signalled to the CA community that the days of lubricating the smooth flow of black money are over. The speech lashed out at the all powerful Institute of Chartered Accountants of India (ICAI) and upset some CAs; but it has been widely applauded by the public and welcomed by honest accountants, who often pay a price for it, as also many young CAs who simply don't want to enter practice because of what they are expected to do. 

In fact, the prime minister (PM) signalled a swachh paisa abhiyaan to clean the system of black money and, later, corruption. The road ahead is going to be just as hard as it is to clear our roads and water bodies of filth and garbage. PM Modi reeled out hard facts to drive home the point that corruption had become endemic in India. He said that there are more than 10 million engineers and management graduates in our country, over 800,000 doctors, crores of palatial houses are built in the cities of our country and about 21.8 million people travelled abroad last year; and, yet, only 3.2 million people declared income above Rs10 lakh while filing tax returns. “Can any one of you believe it?” asked Mr Modi. No, we don't. Many of us are aware of the shockingly small number of taxpayers in the country, but we have always blamed the government for this pathetic state of affairs. 

Mr Modi made it clear that this was not merely rhetoric and he was willing to bear the political cost of a clean-up. Action has already begun and the new weapon at the command of the government isn’t  random raids but hard data analysis. Three hundred thousand companies were under the radar of suspicion after demonetisation and a stunning 100,000 companies were removed from the registrar of companies by “the stroke of a pen” just before 1st July said the PM. A further 37,000 shell companies “engaged in hiding black money and hawala transactions” had been identified for “stern action”. More stringent action was in store for other law-breakers, promised the PM. The import of this speech probably got lost in the din of the launch of the Goods and Services Tax (GST) on the very same day. It certainly did not make media headlines or attract prime-time discussion. But those involved in laundering and churning unaccounted wealth understood its import.

So let us look at the roadmap for this swachh paisa effort. For starters, the PM is already claiming some success. He told the CAs that Swiss banks, which had reported a 42% jump in deposits from India in 2013, have reported a 45% drop this year; and this would go down further when an information-sharing agreement with Switzerland kicks in. Another important step to reduce the round-tripping of Indian money through participatory notes (PNs) has been initiated by the Securities & Exchange Board of India (SEBI). The rules, to charge a $1,000 fee from each PN subscriber once every three years, have been notified in quick time, brushing aside all objections from powerful vested interests. 

Our industry sources tell us that industrialists can no longer manipulate banks by calling people in the government. There is an unwritten message to bank chairmen that the bad debts of the 12 companies identified by the Reserve Bank of India (RBI) committee must not only be settled through hard negotiation but must include a change in management, in most cases. This has had the desired effort of bringing hundreds of smaller corporates, who had built personal assets by diverting bank funds, to the negotiating table. 

The PM’s key focus on CA Day was on the intermediaries who helped companies to fudge accounts and strike shady deals. Here, too, the action will start at the very top—with the all-powerful ICAI which has been notoriously inactive in disciplining its members ever since inception. Mr Modi pointed out that only 25 auditors had faced action in over a decade and 1,400 cases were pending. If you try to find out who these 25 audit firms were, you may have some luck if you Google; but there is nothing on ICAI’s website. I was told by an elected member of a local chapter that no data is uploaded on the website because members can file an appeal to the appellate tribunal and, further, to the high court and the Supreme Court. So ICAI releases a CD of disciplinary action every year. This is how well ICAI protects the shady operators among its members. 

Mr Modi dwelt on the inherent conflict of interest in ICAI’s role. It has the power to decide the CA curriculum, conduct exams, certify a CA’s fitness to practice and to judge whether a member has violated rules and then to punish the guilty. These powers, he repeatedly pointed out, were granted by parliament. What was left unsaid was that they could be revoked in the same manner. One must remember that ICAI is a highly political body with enormous powers and it owes its strength to the cosy relationship it has built up with the ministry of corporate affairs, which supervises it. 

A Times of India blog by Sarvesh Mathur, former CFO of PricewaterhouseCoopers (PwC) India exposes how ICAI office-bearers spend their time and the Institute’s money. His Right to Information (RTI) enquiries have revealed that ICAI spent an average of Rs2.10 crore per annum on foreign travels during 2010-15. On an average, 136 persons travelled abroad each year and each ICAI president during that period went abroad “23, 18, 13, 18 and 22 times, respectively.” This at a time “when Indian Chartered Accountants are not allowed to practice abroad,” says Mr Mathur, who has now turned a whistleblower. 

He has just filed a defamation suit against PwC, before the metropolitan magistrate at Gurugram, accusing it of fudging accounts, intimidation and tarnishing his reputation when he refused to play ball. PwC has denied the allegations and made some counter-charges. But one cannot fail to notice how PwC has been able to avoid severe action from the government and ICAI, despite its repeated involvement in scandals from Satyam (in 2006) to the Global Trust Bank (which collapsed during the Ketan Parekh scam 2001) that were audited by its associate, Lovelock and Lewis.

Obviously, all this and more is being monitored by the PMO. On 24th July, The Times of India reported that the government is all set to put in place a National Financial Reporting Authority (NFRA) to rein in the ICAI for “its perceived failure in ensuring discipline.” NFRA was created under the new Companies Act 2013, but the powerful ICAI successfully blocked implementation for four years. It is unlikely that they can continue to do so. The PM’s warning to CAs and the impact of data mining about spending has also percolated to individual taxpayers. Moneylife Foundation’s tax helpline has seen a spate of queries from people who are getting ready to file taxes for the first time after having failed to disclose income from rent, investments, tuitions, etc, by booking it in the name of spouses or simply collecting cash and not declaring the income. The number of taxpayers has already shot up by 9.1 million in 2016-17 after demonetisation. 

The next constituency, which needs to be given the same treatment, is that of corrupt government servants. It is all very well for the PM to joke about the fact that many CAs cancelled expensive foreign vacations to come back and work round-the-clock. But let us not forget that the beneficiaries of that hard work have been a large swathe of government officials who have not ended their corrupt and capricious ways, despite the arrests of a few officers.

Courtesy : Moneylife