Supreme Court Directs To Constitute Expert Committee Against Defaulting Accounting Firms

The Supreme Court of India has recently observed that Multi-National Accounting Firms (MAFs) are engaging in fraudulent ways while conducting business, totally against the prescribed code of conduct of accounting standards. In order to stop such prima facie violations of law, the center has been directed by the Supreme Court to constitute an Expert Committee to look into the irregularities. The matter was brought to the Apex Court through a Public Interest Litigation (PIL) highlighting the question of whether the MAFs having arrangement with Indian Chartered Accountancy Firms (ICAF’s) are operating in violation of law in force in a secretive manner to evade legal requisites.

The PIL was filed against the alleged malpractices of PricewaterhouseCoopers, which has been accused of violating various provisions of the Foreign Direct Investment (FDI) Policy, Reserve Bank of India (RBI) Act, the Foreign Exchange Management Act (FEMA) and the Code of Professional Conduct under the Chartered Accountants Act, 1949 (CA Act) by infusing foreign money in violation of the FDI norms, engaging in illegal accounting insurance policies and acquiring another auditing firm irregularly.

The Court considered various statutory provisions and inter alia noted that there have been violations under FEMA which lays down that no person resident outside India can make investment by way of contribution to the capital of a firm or a proprietary concern or any association of persons in India without permission of the RBI. Violations of provisions of the Companies Act were also observed, including payments of the insurance premium by three firms of PwC for benefit of other member firms, which is illegal. Further, Code of Conduct of the Chartered Accountants has also been said to be violated as the Code prohibit fee sharing and advertisements. MAFs violate the Code by using International brands and mixing other services with CA services. The court also opined that MAFs seem to be complying with these codes only “in form and not in substances” to defy the laid law.

After analyzing the malpractices being carried out, the Supreme Court held that accounting firms “could not be left to self-regulate themselves” and their regulatory aspect must therefore be looked into by experts in the Government. In wake of such resolution, the Apex Court directed the Central Government to constitute a three-member Committee for the better enforcement of the laws being violated, to consider the need for an appropriate new legislation and mechanism for oversight of profession of the auditors and the Enforcement Directorate and the Institute of Chartered Accountant of India (ICAI) has been directed to examine related issues for effective enforcement of the provisions of the FDI policy and the FEMA Regulations.

Such directions are bound to have repercussions on various players involved in the Accounting business with more stringent and stricter laws coming into effect in the near foreseeable future.