SC calls for a tighter regulatory framework for Multinational Accounting Firms in India

On the day Punjab National Bank appointed PricewaterhouseCoopers (PwC) to investigate the scam involving Nirav Modi and Mehul Chowksi, the Supreme Court has passed a judgment urging the Centre to look into the regulatory policy governing Multinational Accounting Firms in India..A Bench of Justices AK Goel and UU Lalit passed the verdict in an appeal filed against a Karnataka High Court judgment, tagged with along with a PIL initiated by NGO Centre for Public Interest Litigation..It was contended in the petitions that the Multinational Accounting Firms (MAFs) violate Sections 25 and 29 of the Chartered Accountants Act, as well as the Code of Conduct laid down by the Institute for Chartered Accountants in India (ICAI), the Companies Act, and the FDI Policy..An example of PwC Services BV was cited by the petitioner, wherein it was shown that the Dutch audit firm made an investment of Rs. 41.42 crores through PwC, Kolkata to acquire another audit firm through a circuitous route by way of giving interest-free loans to its partners, allowing them to invest the said amount..It was contended that the same violated many provisions of law under the Benami Transactions (Prohibition) Act, the Foreign Exchange Management Act (FEMA), the Chartered Accountants Act, and the RBI Master Circulars..The petition has also alleged that PwC is responsible for the violations of the Satyam scam, failure of the Global Trust Bank (GTB) and UB Group (Kingfisher Airlines), for which action ought to be taken..It is further noted that despite the CBI finding many PwC firms guilty of circumventing the rules, many government contracts have been given to accounting firm..Moreover, it was found by a High Powered Committee Expert Group that since there is no regulatory regime to register the MAFs with ICAI, the MAFs continue to render services which are normally provided by Chartered Accountants, without disclosing the same. The Report of the Expert Group states,.“They hold out to the public that they are actually MAFs in India, whereas to the ICAI they hold out that they are purely Indian CA firms having no relationship with foreign entities. The government, regulators and the ICAI must ensure that such wrong impression is not permitted.”.Taking note of the issues raised by the petitioners and after perusal of the submissions of the respondent MAFs and other stakeholders, the Bench noted,.“In the present context, having regard to the statutory framework under the CA Act, current FDI Policy and the RBI Circulars, it may prima facie appear that there is violation of statutory provisions and policy framework effective enforcement of which has to be ensured.”.The Court also observed that the ICAI, being an expert body, should examine the matter and give its report to concerned authorities for generating appropriate action..The judgment states that ICAI, by adopting a hyper-technical view in the matter, failed to play a proactive role in upholding the ethics and values of the profession by not going into all connected and incidental issues..The Bench also observed that the absence of proper regulatory mechanisms has resulted in many scandals in the past, and therefore, the auditing profession requires a proper mechanism that needs to be revisited from time to time..Finally, the Court held that though it may not involve itself with the policy-making, it can certainly look into the policy framework to ascertain whether safeguards for enforcement of fundamental rights are being duly maintained or not..“As already noted, the Reports of the Study Group and Expert Group show that enforcement mechanism is not adequate and effective. This aspect needs to be looked into by experts in the Government.”.At the end of the judgment, the Bench has directed the Centre to constitute a three-member committee of experts to look into the following 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.”.It has also asked the committee to frame appropriate legislation while keeping in mind statues passed in the United States, such as the Sarbanes Oxley Act, 2002, the Dodd-Frank Wall Street Reform, and the Consumer Protection Act, 2010..The expert committee will also be required to see whether there is a need to form an exclusive oversight body for auditors..Directions have also been issued to the Enforcement Directorate to complete pending investigations in the instant case within a span of three months. The ICAI has been asked to examine all the related issues at an appropriate level within three months..Read judgment :