Last week’s discussion on the state of affairs at the Institute of Chartered Accountants of India (ICAI) has generated such an avalanche of reactions that I thought it only fair to present more views on the matter. More views all in response to one simple question that we have been asking since last week – do we need structural change and the way the ICAI central council and its Vice President and President are elected?

On CNBC-TV18’s show, The Firm, to give some answers and some solutions to that problem are MM Chitale, Former President of ICAI; YM Kale, Former President of ICAI and Group President of Hinduja Group (India); and TV Mohandas Pai, Director & Head - HR at Infosys.

Q: Last week when we debated this issue another well-known CFO DD Rathi termed the state of affairs ICAI as a continuous lowering of standards at the institute. Would you agree with that assessment? Do you think there is need for change?

Pai: The institute reflects the state of society today; today we have society where intellectual thought and intellectual leadership is not given the same kind of respect as earlier. But we need to understand the context in which the institute has been set up.

It is many things all rolled into one. It regulates the entry criteria to be a student to pass an examination. So it holds an examination for students unlike the law profession where you go to a college and get educated. You need to be article; it follows the old guild system. Once you become a member, it regulates how you work; it regulates the kind of training that you need, the certification etc. It has powers of discipline over you, it has a committee like a self regulatory organisation. It sets standards for the entire industry; the whole of India, all the corporate organisations have to follow the standards set by the institute. No other organisation in this country possibly has all four functions.

Now this creates complication and to add to that it is a democratic body run by an elected membership from its membership all over the country and that lasts for only one year. So all things coming into one creates friction and certainly at this time in our state and society, we need to re-look at the entire structure and bring in some changes because society has moved far ahead and we need to possibly break up this kind of a structure and that’s what DD Rathi meant when he said there has been a continued deterioration of whatever the lowering of the standards. But that also is a reflection of how society is…

Q: [Interrupts] Are you making a call for a separation of the training, qualification, duties and responsibilities of the ICAI from the regulatory arm. Are you saying the ICAI has too much on its plate?

Pai: I think the time has come when the debate has to be there and I certainly think that in terms of regulating its members, there is a certain room for greater performance for example, the Satyam issue. There was a member who has been arrested by the Government of India on account of what happened in Satyam.

I would like to see the institute step in and take immediate action. If somebody gets arrested, the least I would expect the institute to do is to suspend membership so that they can put up an investigation body to find out the truth because it has to add to the credibility of the profession. Obviously I have not seen action been taken. If it has, I would like to be educated. So there is a time for debate into all the functions to see what needs to be done in the current context. When the setup in 1949 is okay, 1968 is okay but not today.

Q: Of the action taken against S Gopalakrishnan, the auditor of Satyam was that seven months after he was arrested finally the ICAI said that they had taken him off the 11 committees that he was on — no suspension of membership, which may actually only happen if he is found guilty. But it took them seven months to take him off the 11 committees he was a member of. Not just the Satyam issue, everything that Mr. Pai has articulated about the friction of this institute, the fact that it’s now getting outdated the way it runs, what do we need to do to change it. If at all you believe that that needs to be change?

Kale: When troops attempts to hold more ground then what their supply lines can sustain. The spread become thinnest at the core.

Q: So you are admitting that there is too much on the plate of ICAI.

Kale: I am admitting to no such thing. I am saying that instead of concentrating only on certain manifestations, one should examine the seeds of the slide.

Q: What are the seeds of the slide, according to you?

Kale: I will tell you but before that please understand that the nature of the Chartered Accountants Act is very different from the Advocates Act or other acts. The Chartered Accountants Act keeps CAs from doing anything except what is prescribed whereas other acts keep others from doing what is prescribed for their profession.

In other words, the CA Act shackles CAs whereas other acts shackle competition. Starting with this inherent disadvantage, let us examine, in the light of what I just told you, where the seeds of the slide came?

The seeds of the slide are: first, the sacrifice of language skills; and in that I do not blame the present council. If you want to blame someone, blame me. Blame my generation, which did not foresee that the entrance examination, the papers, the quality — if you do not insist on a grammatically simple correct communication and if that does not become the prerequisite of the qualification, then we are merely amassing a lot of regulatory framework and accountancy.

Q: [Interrupts] we are not even looking at the training and qualification aspect. We are only looking at the regulatory aspect of the ICAI. I am limiting this conversation to that.

Kale: But how can you limit that unless you understand that what has happened is that the very ability to rise to a certain level has been sapped at an early stage and that is the bane and therefore…

Q: So in many words are you saying you are saying that we are not getting the leadership we need at the ICAI, the quality of leadership has declined?

Kale: We are not getting the kind of communication skill and that has meant that there are imperceptibly but irreversibly moving towards lower and lower rungs of the ladder of representation of work.

Q: Do you agree with the assessment that Kale has made or do you agree with what Pai said that whatever the reasons maybe we now need to take stock of the change we need to make at this regulatory body?

Chitale: Yes. Let me go back to the first point which Pai made in terms of various activities carried out by he institute. I do recognize that the institute carries out various kinds of activities and luckily for all the periods of the past to a reasonable extend the institute is doing well. One normally tries to take an exception and beats the exception all around. If you look around he rightly mentioned we are a part of the society and to that extent we get what we find outside but I see no reason for dividing this functions into whatever had been talked about. The simple point being this is a unique body which has been regulating, trading and also monitoring the situation. But let us look at the people who talk about this so much. If you look at the percentage of voting which is the election system and the election percentage so far has been around 50%. There are lots of people who talk about this but the people who actually go and vote are around 50%.

Q: It is a very valid point you raised. It is a point that Rathi raised last time as well saying that we need to find a way to get more chartered accountants to participate in the process of electing their leadership – but that is said and done – you cant force people to go out and vote if they don’t want to vote?

Chitale: In a population of 5-7 crore, this is just 1,70,000. We are all the people who are lucky enough to have passed the examination.

Q: So are you compulsory voting as a quick fix solution to the fact that we have poor leadership at the ICAI?

Chitale: This is not a quick fix solution. Ultimately it is a democracy. If you believe that the democracy has to be given up and something else has to be found out then it is another matter.

Pai: I think in the voting area maybe we should allow electronic voting and postal ballot so that they can vote at their convenience.

Chitale: Absolutely.

Pai: I think there is a small reform that needs to happen that will give flexibility to people to vote and more people will vote and that will be a good thing to do.

Q: That is not where the change needs to stop, do you believe that is where the change needs to stop. What more do we need to do?

Pai: I think the change needs to start at the organization level. We have a president and vice president appointed for a year – that is too short a time for them to make an impact and very president wants to start new programmes and make an impact rightly so because they have been elected for a year. I think we need to have a permanent structure with possibly a president, a president being appointed for five years, not by the membership but by the council and then the chairman of the council being appointed by an election every year maybe there is a better solution or maybe the chairman is appointed for every two years that will give enough time to really do some work. This idea of having one year creates a different kind of pressure.

The second thing we need to do very clearly is to make enforcement mechanism for discipline is taken considerably. Because like you said about Satyam the fact that it took seven months for any action to be taken sends a wrong message. I am not saying that the institute is wrong. They probably had their reasons but public perceptions is important like Kale said in the profession confidence of the public in the profession is the most important asset and for that you need to act and you need to act decisively to show people that you are acting like the government did for Satyam. The government acted within three months, they didn’t take seven months so the institute has to act.

Lastly, setting standards for the entire country in terms of accounting standards and auditing standards. There too I think there is a slight conflict of interest. The world has moved away from that so I think the whole matrix of how the institute runs, how the act is conceptualized needs a further debate as an issue because the world has moved on. Society has moved on and we have a structure of the 1940s and 1950s.

Kale: Your India Inc — as you often call it on your shows — is so obsessed with the producing of bankable balance sheets to please investors and analysts alike, that today the book keeping rectitude has come very low on their priorities. I am sorry to say that these incorrect priorities receive cordial ascent from large sections of society, which should know better. Therefore a part of this blame must rest upon a much wider section than you imagine.

Secondly, all these imbroglios in Hyderabad, which we were looking at, this is only end result but there has been a debasement of the attest function.

Q: Coming to the point of maybe trying to – if not separating — the job of training and qualification and regulatory in two different institutes and two different branches at least creating some degrees of separation for instance the one model that we seem to have replicated in a large way is the way the system works in the UK and that’s what our system seems to be a substantial copy of that. Now even there they do have a chief executive who is mandated along with the heads of the council to direct the institutes’ policies and longer-term plan — maybe is it not time to consider some of the reforms that Mohandas Pai spoke of to consider maybe some of the other structures available in the world?

Kale: I am a member of the English institute and therefore I have seen both institutes as member and certainly you have a point but I think we have had strong secretaries in the past. The fact that the secretary probably does not stand up is only something which is seen from a distance unless one is an insider one would not be able to know that. I think we have had good secretaries and good technical directors in the past. So what has cause the impression that if only you have a CEO he would be able to stand up to the council and not otherwise is something I wouldn’t be able to comment on.

Chitale: I think let’s looks at the basic topic, one has been talking that there is a need for change. I am not trying to say that there is no need for change because any problem thus put us to that question very clearly. But the point is whatever standards are setup today there is an accounting standard board; the drafts are circulated to the people, the industry members are also members of that body and they are expected to respond to that. I think let all these body check-up how many people really respond to that. It’s only after the standards are set up that people start talking about it, they being right or not right. The second point about the change is suggested? Yes, I think any moving organisation would welcome change so I am not against that. The point is we also have a system in the institute where the secretary of the institute is the administrative head and the president is a changing person every year.

Q: How independent is the secretary? Not in your time maybe but nowadays?

Chitale: By the law, he is quite independent. It’s a question of all human beings who occupy the shares.

Q: We cannot blame everything on socio-cultural changes in society. At the end of the day, we cannot say that the quality of the regulator depends on the quality of people in the society?

Kale: Independence is an in-eradicable human instinct, which even antidotes our social instinct. That is ultimately a state of mind.

Q: Fabulous articulation is not going to help the ICAI from the situation it is in.

Pai: Let me put it in perspective. You are more than 150,000 members; you have maybe 500,000 students who are getting trained and a large number getting article, you have a standard setting process which is becoming extremely complex because of globalisation, you have a disciplinary process which requires much more investment to be done. To me it’s a management challenge; the management challenge is enormous, it’s not what it was in 1950 or 1960 but instead of smaller and India is growing at 9%. Do we have this structure and institute to take care of India’s requirement for the next five-ten years? I would say no. If we are out of step with what India needs and I would not say that the institute exist only for its members even though there is a purpose. I would say the institute exist for a public purpose and the public purpose is to ensure that its credibility to financial statement and the regulation of a profession to serve public interest.

So public interest to me predominate the profession and professional needs. So I would say the complexity of management itself makes its incumbent that the whole gamut of activities that the institute does at this point of time requires a re-look. I am only asking for a debate. I am a member of the institute; I am a very proud member. I am extremely proud of the institute; I stand up for institute at all point of time but it will put public interest first before the institute and public interest to my mind demands that we re-look, we debate, we come out with an appropriate structure for the next 10-20 years.

Q: Mr. Chitale believes that maybe there is not that much need for change. This issue of public perception of public good and the perception of whether the institute is able to deliver on that public good, I just want to quote one thing from the Naresh Chandra Committee on the corporate audit and governance dating back to 2002 and then contrast that with a comment that came out at the Confederation of Indian Industry (CII) Task Force on corporate governance again headed by Naresh Chandra just a few weeks ago. In 2002 the committee said: ‘The area of disciplinary mechanism of the audit profession requires careful consideration. According to many who interacted with the Committee, the ICAI, despite best intentions, seems to have been unable to adjudicate disciplinary cases within reasonable time’. That very same Committee report then debates whether we need a Public Company Accounting Oversight Board (PCAOB) structure or not and then goes on to say that instead a Quality Review Board to strengthen and reform the peer review system within the ICAI is probably a better option. Just two weeks ago a Committee on behest of the CII headed by the same Naresh Chandra said this with regards to the quality review board, ‘…the ICAI QRB has not achieved the objectives for which it was established and the Task Force, thus considered it imperative that the QRB is made functional going forward to ensure quality in the audit process…’ It also goes on to say that ‘In the interest of investors, the general public and the auditors, the Task Force recommends that the government intervenes to strengthen the ICAI Quality Review Board and facilitate its functioning of ensuring the quality of the audit process through an oversight mechanism on the lines of Public Company Accounting Oversight Board (PCAOB) in the United States.’

Even you would admit that whether it is on the disciplinary front or it’s on the review or oversight front the ICAI at least in public perception seems to have failed?

Chitale: Let’s look at the basic issue; I would agree that the society demands that the quality issue would be maintained and the institute will exist only as long as the society gets what it deserves. I totally agree on that. But on this Quality Review Board having established for last one year, I am not aware what it has done actually. So to that extent it needs a change…

Q: [Interrupts] But it’s not done enough by a committee that went into the details of this and says that it needs to be strengthened through government intervention?

Chitale: But why do we try to believe that everything which needs a change it’s only government which can do the change. Why do we keep on always believing that there are people who are waiting to make a change and we believe as if a magician waiting somewhere that he can come and make the changes. We have been saying that the quality is not good.

Let’s look at the audit reports which are submitted. There are two kinds of situations; there are audit reports which are submitted, there are qualified audit reports which are submitted to all the regulators and to the departments of the company affairs etc, let us understand how many of these qualified reports have been acted upon and there are how many cases, the regulators and those who are managing this situation question the companies about why the qualifications exist in the audit report. While we keep on talking that there is a change require; the change is I think on both sides.

Q: You can keep rolling the ball back in the India Inc’s court, so to speak, that is a different problem but the fact is that if the change does not come from within it has to come from outside – from outside the only person who can do that is the government that is why I think this ICAI mentioned that?

Kale: Public interest is paramount and for that, a service providing profession must not be allowed to turn into a survival business. Today there are two kinds of chartered accountancy profession developing. One are doing are eking out their living, reducing themselves to meaner and meaner lower rungs of representational ladder and there is another where these are basically marketing organizations who happen to perform in the domain of accounting and auditing.

Pai: Mr Kale has put it in his inimitable style and great language that there is a need for change. I have got a proposal. I think we should have a group set up by the institute itself to do a social audit, consisting of past presidents possibly Chitale and Kale, two eminent jurists, two businessmen and two young members of not more than 10 years in profession because whatever changes is going to come is going to impact them.

They must sit down, introspect, look into the future, talk to a lot of people and look at what is happening and come out of a model for the next 10-20 years. Unless we do that constantly how will the public believe us because the public only sees the bad things, they do not see the good things. Look we ensure the financial integrity of this country.

Let me clear we are the professionals which will ensure the financial integrity of this country. The balance sheets and everything that we sign that is function make sure the financial system is stable and runs. We have a great genesis for finance and accounting. We perform extremely important role to keep this country going. But we must introspect, we must come out of the view and tell the government this is the change we want instead of letting many other things come into the middle and go on hitting us and demeaning us and telling us we are bad. We are not bad we are good people. We have a noble profession. Yes, 4-5% something’s go wrong it could happen anywhere but we have to introspect, we have got to talk of about it otherwise we are going to have the outside world overwhelmed like Kale said we will not be able to counter.

Q: You do not want the government to step in but if the institute itself does not do anything from within then the government and other agencies will be forced to step in. We are not trying to find solutions on a 20-minute television show. Is your assessment that the council today is actually even willing to introspect?

Chitale: Everybody who thinks seriously about the matter must be willing to introspect and a programme like this is quite useful in the sense that if somebody is not willing to introspect at least this will force them to do that. So to that extent the debate is most welcome. I agree that there is a need for a change but the change does not mean taking a complete 360-degree upturn.

Q: What do we do?

Kale: Those who merely report upon deeds performed by others can hardly be equal to those who perform the deeds worthy of being reported. Therefore we must teach this profession to aspire but and not to grovel.

Q: What you have told me in many words is that you are hopeful for change. Do you believe that considering how politicizes the process has got in today, I mean, last week we were discussing, it may be one of but we were discussing an instance of booth capturing in council elections — this is absurd. Do you believe that the system today, which is so politicized is even willing to introspect?

Kale: I should hope so.