ICAI to Assist SEBI in Combating Financial Fraud

To strengthen financial discipline, the Institute of Chartered Accountants of India (ICAI) will ally with the Securities and Exchange Board of India (SEBI) to combat the growing cases of financial fraud in the country. This joint effort aims to supervise the stronger detection, investigation, and prevention of corporate wrongdoings so that investors' confidence is strengthened and the markets stabilised.

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Rising Concerns Over Financial Irregularities

The Indian financial landscape has seen a complex growth of white-collar crimes involving fund syphoning through various related-party transactions and account misrepresentation. According to SEBI's long-time member S.K. Mohanty, chief financial officers (CFOs) must essentially be the first line of defence against such malpractices. In many cases, frauds have remained undetected due to a lack of internal control and due diligence; hence, he stressed the need for stricter checks and balances against corporations. 

ICAI's Forensic Accounting and Investigation Standards

In the face of these challenges, ICAI has developed an elaborate set of Forensic Accounting and Investigation Standards (FAIS). These standards set the framework under which forensic audits and investigations are to be conducted to ensure that results are consistent and legally admissible. The FAIS includes concepts like definition, engagement management, assignment execution, special areas, and quality control. Therefore, by standardising forensic practices, the ICAI intends to empower professionals with the mechanisms to discover and expose instances of fraud. 

SEBI's Enhanced Regulatory Measures

With the growing sophistication of financial fraud, SEBI has taken on several initiatives to strengthen its regulatory framework. Establishing a dedicated investigation department with mostly chartered accountants shows SEBI's resolve to enrich its enforcement actions with specialised expertise. The department pursues a stronger and more refined approach to regulatory oversight of market frauds, insider trading, and other violations. 

Mandating Institutional Mechanisms for Brokers

To further the objective, SEBI has ordered the stockbrokers to set up institutional mechanisms to prevent and detect fraud and market abuse. Under SEBI (Stock Brokers) (Amendment) Regulations, 2024, brokers need to put systems in place for the surveillance of trading activities and internal control that offer a whistle-blower policy. The timeline for implementation would get staggered depending upon the size of the broking firm. Bigger firms shall comply by 1st January 2025, while the smaller ones must comply by 1st April 2026. 

Calls for Enhanced Disciplinary Powers

Recognising a need for stricter disciplinary measures, a SEBI-appointed panel has recommended that ICAI be empowered to levy penalties against audit firms for repeated violations. The panel proposes enforcement of fines by ICAI for up to ₹5 crore against audit firms that commit more than three violations. Meanwhile, for greater deterrence from wrongdoing and to create a peer culture for accountability, the panel also recommends the public disclosure of information on punitive actions taken against its members. 

Collaborative Efforts for Market Integrity

The alliance built between ICAI and SEBI signifies an endeavour to fortify the integrity of financial markets in India. Regulatory oversight fused with professional judgement should strive toward a more resilient financial ecosystem that can ascertain and deter fraudulent activities. This association aims to safeguard investor interests and raise the culture of transparency and compliance in the corporate sector.

Looking Ahead

As financial frauds become more complex, robust regulatory frameworks and professional vigilance assume greater importance. Joint initiatives by ICAI and SEBI represent a forward-thinking response to these issues and may thus keep India's financial markets safe and trustworthy. Stakeholders, regulators, professionals, and corporate entities must continue working together and innovating to raise the bar on financial integrity.