Violations by Foreign Accounting Firms - SC asks Govt to set up Panel
Published: Feb 24, 2018
By TIOLCORPLAWS News Service
NEW DELHI, FEB 24, 2018: The Apex Court on Friday directed the Govt for constitution of an expert panel to examine the regulatory framework for the purpose of enforcing statutory code of conduct against Multinational Accounting Firms. The Apex Court also also directed that Committee of experts should also examine the need for a separate regulation on the pattern of overseas bodies to oversee the profession of the auditors.
A PIL was filed before the High Court to seek direction for exercise of power u/s 21 of the CA Act to initiate investigation against Multi-National Accounting Firms (MAFs) and Indian Chartered Accountancy Firms (ICAFs) having arrangement with such MAFs in breach of Code of Professional Conduct and also to take penal action by way of cancellation of permission granted to them by the Institute of Chartered Accountants of India (ICAI). It was pleaded before the HC that MAFs were illegally operating in India and providing Accounting, Auditing, Book Keeping and Taxation Services. Operations of such entities were alleged to be in violation of Companies Act, the CA Act and the Code of Conduct laid down by the ICAI.
The stand of the ICAI in the form of a status report filed before the High Court was that 161 out of 171 firms were examined by the High Powered Committee in pursuance of report of the Expert Group dated 29th July, 2011 with regard to alleged violations and some of the cases were referred to the Director (Discipline) for further action. Remaining 10 firms were in the process of being examined. The High Court observed that in view of the stand of the ICAI, no further action was necessary and disposed of the writ petition.
Thereafter, PIL was filed directly in the Apex Court, which stated that PricewaterhouseCoopers Private Limited (PwC) and their network audit firms operating in India, apart from other violations, had indulged in violation of Foreign Direct Investment (FDI) policy, Reserve Bank of India Act (RBI) & Foreign Exchange Management Act (FEMA) which requires investigation. Firms operating under the brand name of PwC received huge sums from abroad in violation of law but the concerned authorities had failed to take appropriate action. The SFIO and CBI had found PwC taking undue advantage of many loopholes in the regulatory regime.
Therefore, the Apex Court issued following directions :
(i) The Union of India may constitute a three member Committee of experts to look into the question whether and to what extent the statutory framework to enforce the letter and spirit of Sections 25 and 29 of the CA Act and the statutory Code of Conduct for the CAs requires revisit so as to appropriately discipline and regulate MAFs. The Committee may also consider the need for an appropriate legislation on the pattern of Sarbanes Oxley Act, 2002 and Dodd Frank Wall Street Reform and Consumer Protection Act, 2010 in the USA or any other appropriate mechanism for oversight of profession of the auditors.
(ii) The ED may complete the pending investigation within three months;
(iii) ICAI may further examine all the related issues at appropriate level as far as possible within three months and take such further steps as may be considered necessary.
While giving the decision, the Apex Court observed that, there was a bar under CA Act to practice as CAs for a company which includes a limited liability common partnership which has company as its partners. Code of Conduct for the CAs prohibits fee sharing, advertisements but the MAFs by using international brands and mixing other services with the services to be provided as part of practice of chartered accountancy violate the said Code of Conduct for which there was no regulatory regime as the MAFs do not register themselves with ICAI. It was observed that the Indian firms using similar brand names are registered with the ICAI but the real entities being MAFs, ICAI is unable to take requisite action for violation of Code of Ethics by the MAFs. Thus, revisit of existing legal framework may become necessary so as to have an oversight mechanism to regulate MAFs on the touchstone of Code of Ethics.
