SC Says Multi-National Accounting Firms Are Prima Facie Violating The Law; Directs Centre To Constitute Expert Committee [Read Judgment]

The Supreme Court, on Friday, directed the Centre to constitute within two months a Committee of Experts in order to look into the functioning of the Multi-national Accounting Firms (MAFs) in India. This Committee would have to submit a report on the issues highlighted by the Court within three months thereafter.The Bench comprising Justice A.K. Goel and Justice U.U. Lalit was hearing an appeal demanding investigation against MAFs and Indian Chartered Accountancy Firms (ICAFs) having arrangement with such MAFs, for breach of Code of Professional Conduct under the Chartered Accountants Act, 1949. This Appeal had been clubbed with another Petition demanding similar reliefs. The issue raised in both matters was:"Whether the MAFs are operating in India in violation of law in force in a clandestine manner, and no effective steps are being taken to enforce the said law. If so, what orders are required to be passed to enforce the said law."The allegationsThe Appellant had alleged that MAFs were illegally operating in India, in violation of Section 224 of the Companies Act, 1956, Sections 25 and 29 of the CA Act, and the Code of Conduct laid down by the ICAI.The PIL, argued by Advocate Prashant Bhushan, had alleged malpractices by leading MNC auditor PricewaterhouseCoopers (PwC). The Petition had alleged that PwC and its network audit firms operating in India had indulged in infusing foreign money in violation of the FDI norms, engaging in illegal accounting insurance policies and acquiring another auditing firm irregularly. It was, therefore, accused of violating various provisions of the Foreign Direct Investment (FDI) policy, Reserve Bank of India (RBI) Act and the /Foreign Exchange Management Act (FEMA).The Petition had then demanded that falsification of accounts be made a non-bailable offence to ensure effective governance and to avoid potential loss of revenue to the public exchequer. It had further demanded that an independent regulator be appointed for auditors and that allegations against PwC be investigated into.High Powered Committee Expert Group ReportThe Court referred to the report submitted by the High Powered Committee Expert Group on Operation of MAFs in India, which was constituted by the ICAI in wake of the Satyam Scam.This Committee had made various recommendations, including action to be taken against firms which share revenue with multi-national entities and those which receive financial grant from multinational entities in spite of this being prohibited. It had further recommended that it should be made compulsory for all firms which enter into any kind of arrangement with a foreign entity to disclose such arrangement every year to ICAI.Furthermore, it had suggested that no MAF should be allowed to directly or indirectly operate in India without specific approval of the ICAI's Council. It had also emphasized on the need for a 'No Objection' from the ICAI and the RBI for MAFs to engage in audit and assurance services in India.Statutory provisionsThe Court considered various statutory provisions and inter alia noted that while Code of Conduct for CAs prohibits fee sharing and advertisements, MAFs violate this Code by "using international brands and mixing other services with the services to be provided as part of practice of chartered accountancy."It then observed that it prima facie appeared that statutory provisions and policy frameworks were being violated by the MAFs. It explained that the MAFs seemed to be complying with these only "in form and not in substance", by registering partnership firms with Indian partners, even though the foreign companies remained the real beneficiaries of the business of chartered accountancy. Such partnership firms, it said, were "merely a face to defy the law".Another aspect highlighted by the Court was that of investment in CA firms, in violation of prohibition of FDI policy, by using a circuitous route of interest free loans to partners.Therefore, highlighting the need for a revisit of the existing framework, it stated, "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."The Court then suggested that the law be amended to separate regulatory regime for auditing services on the lines of the Sarbanse Oxley Act enacted in the US. It further clarified that remittances from outside India should be considered investment even when they are claimed to be interest fee loans to partners.Investigation by various authoritiesHaving examined submissions of the parties as well as various authorities, the Court held that a "a case is made out for examination" by the Enforcement Directorate, the ICAI as well as the Central Government, with regard to issues of violation of RBI/ FDI...

SC Says Multi-National Accounting Firms Are Prima Facie Violating The Law; Directs Centre To Constitute Expert Committee [Read Judgment]

Apoorva Mandhani

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