Date: 23rd February, 2018
Writ Petitions:
Civil Appeal No. 2422 of 2018: Arising out
of SLP (Civil) No. 1808 of 2016 and Write Petition (Civil) No. 991 of 2013
Issue/s Involved:
“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.”
Averments:
a. MAF are operating illegally in India and
providing Accounting, Auditing, Book Keeping and Taxation Services.
b. They are operating with the help of ICAFs
illegally.
c. Operations of such entities are, inter alia,
in violation of Section 224 of the Companies Act, 1956, sections 25 and 29 of
the CA Act, the Code of Conduct laid down by the Institute of Chartered
Accountants of India (‘ICAI’ or ‘Institute’).
(Reference: Report dated 15th
September, 2003 of Study Group of the ICAI)
Study Group Report dated 15th September
2003:
The Study Group was constituted by the
Council of the ICAI in July, 1994 to examine attempts of MAFs to operate in
India without formal registration with the ICAI and without being subject to
any discipline and control. This was in the wake of liberalisation policy and
signing of GATT by India.
It was noted by the study group that the
bodies corporate formed for management consultancy services were being used as
a vehicle for procuring professional work for sister firms of Chartered
Accountants. Members of ICAI were associating with such board of directors,
managers etc. to provide escape route to MAFs. CA function must be discharged
by animate persons and not in anim bodies.
The concerns of various segments of CAs
noted by the Study Group are as under:
a) Sharing fees with non-members;
b) Networking and consolidation of Indian firms;
c) Need to review the advertisement aspect;
d) Multi-disciplinary firms with other
professionals;
e) Commercial presence of multi-national
accounting firms;
f) Impact of similarity of names between
accountancy firms and MAFs/Corporates engaged in MSC-Scope for reform and
regulation;
g) Strengthening knowledge base and skills;
h) Facilitating growth of Indian CA firms &
Indian CAs internationally;
i) Perspective of the Government, corporate
world and regulatory bodies and role of ICAI;
j) Introduction of joint audit system;
k) Recognition of qualifications under Clause (4)
of Part I of the First Schedule to the Chartered Accountants Act, 1949 for the
purpose of promoting partnership with any persons other than the CA in practice
within India or abroad;
l) Review the concept of exclusive areas keeping
in view the larger public interest involved so as to include internal audit
within it;
m) Conditionalities prescribed by certain
financial institutions/Governmental agencies insisting appointment of select few
firms as auditors/concurrent auditors/consultants for their borrowers.
Further allegations by the writ petitioners
directly filed in SC:
PricewaterhouseCoopers Private Limited
(PwCPL) and their network audit firms operating in India, apart from other violations,
have 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 PwCPL received huge sums
from abroad in violation of law and applicable policies but the concerned
authorities have failed to take appropriate action. M/s. Pricewater House,
Bangalore was the Auditor of the erstwhile Satyam Computer Services Limited
(Satyam) for more than eight years but failed to discover the biggest
accounting scandal which came to light only on confession of its Chairman in
January, 2009. The said scandal attracted penalty of US Dollars 7.5 Million
(approx. Rs.38 crores) from the US Regulators apart from other sanctions. Since
certification by Auditors is of great importance in the matter of payment of
subsidies, export incentives, grants, share of government revenue and taxes,
sharing of costs and profits in PPP (Public Private Partnership) contracts etc.,
oversight of professionals engaged in such certification has to be as per law
of the land. Accordingly, even though investigation was sought by the
petitioner vide letter dated 1st July, 2013, no satisfactory
investigation has been done.
ICAI Expert Group Report dated 29th July
2011 (Report made in the wake of Satyam scam):
The expert group constituted by the ICAI
also examined the issues concerning operation of MAFs in India. Issues
referred to the Expert Group by the High Powered Committee group of the
ICAI are:
a) Manner in which certain Indian CA firms, hold
out to public that they are actually MAFs in India, the manner in which
assignments are allotted, determination of nexus/linkage. The representatives
of certain Indian CA firms carry two visiting cards one of Indian CA firm and
another of a multinational entity. They represent the multinational entity and
seek work for Indian CA firm.
b) Name used by auditor in his/her report – The
basic question was whether the auditors of M/s. Satyam had correctly mentioned the
name of their firm in the audit report.
c) Terms and conditions and cost payable for use
of international brand name – No international firm will allow its name to be
used by all and sundry. The question is what is the consideration whether it is
determined as a percentage of fee or profits and whether it is within the
framework of Chartered Accountants Act, 1949, Regulations framed, thereunder
Code of Conduct and Ethics.
d) Nature of extra benefits accrued to the Indian
CA firms having foreign affiliation.
e) How the MAFs placed their foot in India – Long
back in a meeting with RBI it was informed that the MAFs entered in India to
set up representative offices. No documents are available as regards the terms
and conditions set out while granting them permission to operate in India.
However, the RBI vide its letter No.Ref.DBS.ARS.No.744/08:91:008 (ICAI)/
2003-2004 dated 23rd March, 2004 inter alia, mentioned that
“RBI has not permitted any foreign audit firm to set up office or to carry out
any activity in India under the current exchange control regulations.
f) Contravention of permission originally
granted by Government – What was the original permission given for these firms
to enter into India and subsequently whether they are adhering to the terms and
conditions of that permission? If contravention was found to take up with
Government/FIPB – for approaching Government or FIPB, ICAI must have
information as to the nature of permission given. As already mentioned, no
documents are available indicating the nature of permission granted. What is
the current position of international trade in accounting and related services?
The opening up of accounting and related services, can be linked to reciprocal
opening up by developed countries.
g) Additional powers required by ICAI to curb the
malpractices – If under the existing legislation, ICAI does not have enough
powers to curb this practice, whether they would need more powers. A separate
proposal for amendment of Chartered Accountants Act, 1949 has been sent by the
Council to the Government seeking additional powers.
The Expert Group observed that MAF solicits professional work in an international brand name.
They have registered Indian CA firms with the ICAI with the same brand names
which are their integral part. There is no regulatory regime for their
accountability. Thus, the principle of reciprocity u/s. 29 of the CA Act,
Section 25 prohibiting corporates from chartered accountancy practice and Code
of Ethics prohibiting advertisement and fee sharing are flouted. The MAFs also
violate FDI policy in the field of accounting, auditing, book keeping, taxation
and legal services.
The Expert Group recommended that no person or entity and specially Chartered Accountants can
hold out to public that they are operating in India as or on behalf or in their
trade name and in any other manner so as to represent them being part of or
authorised by MAFs to operate on their behalf in India or they are actually
representing MAFs or they are MAFs office/representatives in India, except
those registered with ICAI in terms of clause (Hi) as a network, in accordance
with network guidelines as notified by ICAI from time to time.
Status Report by the ICAI
The Institute called for information from
171 Indian CA firms perceived to be having international affiliation to examine
whether they are functioning within the framework of CA profession. However,
the said firms were reluctant to submit copies of agreements with foreign
entities and their tax returns. Certain CA firms submitted the documents by
masking certain portions contained in their agreements, partnership deeds and
assessment orders/income tax returns claiming confidentiality and commercially
sensitive nature of the documents. Some of the firms did not provide the
details. Some of the findings from the data collected were as follows:
a) The multinational entity has granted
permission to the participating firms in the network to use the brand name.
This is notwithstanding the fact whether the firms have signed the License
Agreement with the entity or not. The relationship between members and firms
and how these are governed from same offices under common management and
control is not disclosed. The data disclosed on the website, however, clearly
brings out the linkage.
b) Though some of the firms participating in the
networks have not signed the Verein document of Name License Agreement, yet
while making remittances to the multinational entity, the revenue of the entire
network is taken into account.
c) Firms received financial grants from non-CA
firms. A member of the Institute is prohibited
from receiving any part of profits from a non-member of the Institute. Such an
act on the part of a member/firm seems to be in violation of Item (3) of Part I
of the First Schedule to the Chartered Accountants Act 1949.
d) The networking firms have made remittances to
a multinational entity, sharing their revenue which they have claimed to be
towards subscription fees, technology cost and administration cost etc.
in violation of Code of Ethics and regulations under CA Act.
e) Firms used the words such as “In Association
with ….”, Associates of ……..”, Correspondents of ……” etc. on the
stationery, letter-heads, visiting cards thereby violating provisions of Item
(7) of Part I of the First Schedule to the Chartered Accountants Act,1949. The networking firms in Network and all their
personnel are using the domain name identical to the name of the multinational
entity in their email IDs and the same is displayed in their visiting cards.
f) The obligations set out in respect of some of
the CA firms as per the sub-licensee agreement give a clear indication that the
CA firms are under the management and supervision of a non-CA firm for matters
such as admission of partners, merger, purchase of assets, etc.
g) Some of the firms in Network have admitted
that the global network identifies broad market opportunities, develops
strategies, strengthens network’s internal products and promotes international
brand. The member firms in India also gain access to brand and marketing
materials developed by their overseas affiliate, thereby indirectly soliciting
professional work.
h) Most of these firms have a name license
agreement to use International brand name. One of the terms of such agreement
is that apart from common professional standards etc., the Indian
affiliates shall harmonize their policies etc. with the global policies
of the network. In this manner, matters such as selection and appointment of
partners, acquisition of assets, investment in capital etc. are
regulated through the means of such agreements and at time even the
representative voting is held by an aligned private limited company rather than
the CA firms themselves. As a consequence of this, the control of the Indian CA
firms is effectively placed in the hands of non-members/companies/foreign
entities.
i) The member firms are required to refer the
work among themselves. In respect of some firms, referral fee is payable and
receivable. Agreements also provided for use of name and logo. Payment/receipt
of referral fee is prohibited as per code of conduct applicable to CAs.
In the light of the aforesaid findings,
following recommendations were made to the Council:
a) The Council should consider action against the
firms which had not given the full information.
b) Consider action against the firms who are
sharing revenue with multinational entity/consulting entity in India which may
include cost of marketing, publicity and advertising as against the ethics of
CAs or receiving grants from them.
c) Action to be taken against the audit firms
distributing its work to other firms and allowing them access to all
confidential information without the consent of the client;
d) Require the CA firms to maintain necessary data
about the remittances made and received on account of networking arrangement or
sharing of fee;
e) Consider action against firms being paid or
offered referral fee;
f) To disclose their international
affiliation/arrangement every year to the Institute;
g) Council should consider action against the
firms using name and logo of international networks and securing professional
business by means not open to CAs in India;
h) Only CAs and CA firms registered with ICAI
should be permitted to provide audit and assurance services. Wherever MAFs are
operating in India, directly or indirectly, they should not engage in any audit
and assurance services without ‘No Objection’ and permission from ICAI and RBI.
Directives issued by the court:
Important observations of the SC:
“Though the Committee analysed available
facts and found that MAFs were involved in violating ethics and law, it took
hyper technical view that non availability of complete information and the
groups as such were not amenable to its disciplinary jurisdiction in absence of
registration. A premier professionals body cannot limit its oversight functions
on technicalities and is expected to play proactive role for upholding ethics
and values of the profession by going into all connected and incidental
issues.” (Page 68)
“It can hardly be disputed that
profession of auditing is of great importance for the economy. Financial
statements audited by qualified auditors are acted upon and failures of the
auditors have resulted into scandals in the past. The auditing profession
requires proper oversight.” (Page 69)
On the basis of various reports and findings
as discussed aforesaid, the Court issued the following directives:
a) 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.
b) To consider need for appropriate legislation
on the pattern of Sarbanes Oxley Act, 2002 and Dodd Frank Wall Street Reform
and Consumer Protection Act, 2010 in US or any other appropriate mechanism for
oversight of profession of the auditors.
c) Question whether on account of conflict of
interest of auditors with consultants, the auditors’ profession may need an
exclusive oversight body may be examined.
d) It may also consider steps for effective
enforcement of the provisions of the FDI policy and the FEMA Regulations
referred to above.
e) Such Committee may be constituted within two
months. Report of the Committee may be submitted within three months
thereafter.
f) The Enforcement Directorate (ED) may complete
the pending investigation within three months.
g) 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.
(The above decision is a summery. Full
text of the decision may be read on the Supreme Court portal:
http://sci.gov.in/supremecourt/2013/35041/35041_2013_Judgement_23-Feb-2018.pdf
)
