It is not uncommon these days to hear expressions of grave concern within our profession about losing the dignity of the profession and a general decline in intra profession courtesy. At the same time, leaders of our Government are criticizing our profession for inefficiency and not delivering the result at par with their expectations. The criticism may have a political compulsion as Tsunami of demo and GST is followed by PNB scam. Now The Supreme Court has passed the strictures over our alma mater and shown the mirror to all of us. We would prefer to forgo the critical commentary about our profession which has become commonplace in the print media and leaders tongue but few of us are overjoyed by the judgement of Supreme Court.
Recently, The Hon’ble Supreme Court of India has issued the directions to the Union of India, The Institute of Chartered Accountants of India and The Enforcement Directorate in a civil appeal no. 2422 of 2018 (arising out of special leave petition (civil) no.1808 of 2016 having S. Sukumar…appellant versus the Secretary, The Institute of Chartered Accountants of India & others….respondents with writ petition (civil) no. 991 of 2013 centre for public interest litigation…petitioner versus Union of India & others….respondents on the malfunctioning of Big 4 on the Indian Soil.
The Hon’ble Supreme Court of India issued the following three 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 US or any other appropriate mechanism for oversight of profession of the auditors. The question whether on account of conflict of interest of auditors with consultants, the auditors’ profession may need an exclusive oversight body may be examined. The Committee may examine the Study Group and the Expert Group Reports referred to above, apart from any other material. It may also consider steps for effective enforcement of the provisions of the FDI policy and the FEMA Regulations referred to above.
It may identify the remedial measures which may then be considered by appropriate authorities. The Committee may call for suggestions from all concerned. Such Committee may be constituted within two months. Report of the Committee may be submitted within three months thereafter. The UOI may take further action after due consideration of such report.
(ii) The ED may complete the pending investigation within three months;
(iii)ICAI may further examine all the related issues at an appropriate level as far as possible within three months and take such further steps as may be considered necessary.
The important points to be taken up in compliance with above directions do include the following fine points at the various levels.
1. THREE MEMBER COMMITTEE OF EXPERTS
The union of India may appoint a three-member committee of experts to look into the issues and may call for suggestions from all concerned. Such Committee may be constituted within two months. Report of the Committee may be submitted within three months thereafter. The UOI may take further action after due consideration of such report. The committee may look the following questions
A. SECTIONS 25 AND 29 OF THE CHARTERED ACCOUNTANT ACT
The committee may look, whether and to what extent the statutory framework to enforce the letter and spirit of Sections 25 and 29 of the CA Act. What’s in Section 25 and 29 of the CA Act?
Section 25. Companies not to engage in accountancy
(1) No company, whether incorporated in India or elsewhere, shall practise as chartered accountants.
[Explanation −For the removal of doubts, it is hereby declared that the “company” shall include any limited liability partnership which has company as its partner for the purposes of this section.]
(2) If any company contravenes the provisions of sub-section (i), then, without prejudice to any other proceedings which may be taken against the company, every director, manager, secretary and any other officer thereof who is knowingly a party to such contravention shall be punishable with fine which may extend on first conviction to one thousand rupees, and on any subsequent conviction to five thousand rupees.
Section 29. Reciprocity
(1) Where any country, specified by the Central Government in this behalf by notification in the Official Gazette, prevents persons of Indian domicile from becoming members of an institution similar to the Institute of Chartered
Accountants of India or from practising the profession of accountancy or subjects them to unfair discrimination in that country, no subject of any such country shall be entitled to become a member of the Institute or practise the profession of accountancy in India.
(2) Subject to the provisions of sub-section (1), the Council may prescribe the conditions, if any, subject to which foreign qualifications relating to accountancy shall be recognised for the purposes of entry in the Register.
The Supreme Court further remarked that the ICAI does not claim to have conducted complete investigation for want of complete information into the issue whether the chartered accountancy firms by receiving remittances from outside India or remitting licence fee/network charges outside India have allowed participation of a company or a foreign entity in the accountancy business in violation of Section 25 of the CA Act and whether use of the common brand names by the network firms are in violation of reciprocity stipulated under Section 29 of the CA Act. The ICAI should have taken the matter to a logical end, by drawing an adverse inference, if the information was withheld by the concerned groups.
B. APPROPRIATELY DISCIPLINE AND REGULATE MAFS
The committee may look into the statutory Code of Conduct for the CAs requires revisiting so as to appropriately discipline and regulate MAFs and to further suggest that an oversight body on the line of so-called the Financial Stability Oversight Council (FSOC) or The Commission on Auditors Responsibility ( AICPA ) of the US .
C. APPROPRIATE LEGISLATION
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 US or any other appropriate mechanism for oversight of the profession of the auditors.
‘Sarbanes-Oxley Act of 2002 – SOX’
The Sarbanes-Oxley Act of 2002 (SOX) is an act passed by U.S. Congress in 2002 to protect investors from the possibility of fraudulent accounting activities by corporations. The SOX Act mandated strict reforms to improve financial disclosures from corporations and prevent accounting fraud. The SOX Act was created in response to accounting malpractice in the early 2000s when public scandals such as Enron Corporation, Tyco International plc, and WorldCom shook investor confidence in financial statements and demanded an overhaul of regulatory standards. In addition to the financial side of a business, such as the audits, accuracy and controls, the SOX Act also outlines requirements for information technology (IT) departments regarding electronic records.
Dodd Frank Wall Street Reform and Consumer Protection Act, 2010 in US
The Supreme Court in its judgement referred to another law in US ‘Dodd-Frank Wall Street Reform and Consumer Protection Act, 2010’ to ensure more transparency and accountability of financial institutions to decrease the risk of investing needs consideration. The Dodd-Frank Act (fully known as the Dodd-Frank Wall Street Reform and Consumer Protection Act) is a United States federal law that places regulation of the financial industry in the hands of the government. The legislation, which was enacted in July 2010, created financial regulatory processes to limit risk by enforcing transparency and accountability. The Dodd-Frank Act followed a number of financial regulation bills passed by Congress to protect consumers, including the Sarbanes-Oxley Act in 2002 and the Gramm-Leach-Bliley Act in 1999. Dodd-Frank created the Consumer Financial Protection Bureau (CFPB) to protect consumers from large, unregulated banks and consolidate the consumer protection responsibilities of a number of existing bureaus, including the Department of Housing and Urban Development, the National Credit Union Administration and the Federal Trade Commission.
D. AUDITORS’ PROFESSION MAY NEED AN EXCLUSIVE OVERSIGHT BODY
The Committee may also consider Question whether, on account of conflict of interest of auditors with consultants, the auditors’ profession may need an exclusive oversight body be examined. The Supreme Court in its judgement referred to another law in US ‘Dodd-Frank Wall Street Reform and Consumer Protection Act, 2010’ to ensure more transparency and accountability of financial institutions to decrease the risk of investing needs consideration. It sets up an oversight body called the Financial Stability Oversight Council (FSOC). Further, the committee shall see to it, how to prevent corporate analysts from benefitting from the conflict of interests, how to check audit companies from providing other than audit services and how to lay down protocol for auditors.
E. ENFORCEMENT OF THE PROVISIONS OF THE FDI & FEMA REGULATIONS
The Committee may also consider steps for effective enforcement of the provisions of the FDI policy and the FEMA Regulations referred to above. There are definite remittances from outside India and vice versa. The same has been termed as an investment, non-refundable grant, interest-free loans to partners or payment for taking over an Indian chartered accountancy firm. There is a possibility of violation of FDI policies, FEMA Regulations and the CA Act. FDI Policy and the RBI Guidelines framed under the FEMA prohibit the investment by a person outside India to make an investment by way of contribution to the capital of a firm or a proprietary concern without permission of the RBI. Thus, the committee shall look into it and suggest measures for effective enforcement.
F. TO SUGGEST REMEDIAL MEASURES
The committee may identify the remedial measures which may then be considered by appropriate authorities.
2. ED TO COMPLETE THE PENDING INVESTIGATION WITHIN THREE MONTHS
The Supreme Court pointed out that the investigation by the ED is said to be still pending, though several persons are said to have been examined and documents collected, which are under scrutiny. The said investigation relates to FEMA violations. It is an undisputed fact that there are remittances from outside India. The same could be termed as an investment even though the remittances are claimed to be interest free loans to partners. The amount could also be for taking over an Indian chartered accountancy firm, the relationship of partnership firms, though having Indian partners, operating under a common brand name from the same infrastructure, with the foreign entity is not ruled out. It is not possible to rule out any violation of FDI policies, FEMA Regulations and the CA Act. Thus, appropriate action may have to be taken in pending proceedings or initiated at an appropriate forum.
3. ICAI TO FURTHER EXAMINE ALL THE RELATED ISSUES
ICAI may further examine all the related issues at an appropriate level as far as possible within three months and take such further steps as may be considered necessary. The ICAI currently does three big things. One, ICAI drafts accounting standards. It sends these to the National Advisory Committee on Accounting and Auditing Standards (NACAAS), a body that resides in the MCA and notifies these standards. There are strong indications to implement NFRA would now supersede NACAAS. Two, ICAI sets internal auditing standards. Three, ICAI regulates its members. In all these three domains, NFRA could supersede ICAI or NACAAS, as the case might be. Notably, the NFRA will have the power to act against audit firms. This is a step up over the ICAI, which can only take up disciplinary proceedings against individuals but not against a firm. Though ICAI at its part to impress upon the Government not to go ahead for the NFRA and played its bats for strengthening ICAI’s existing disciplinary mechanism to increase its independence, rather than have another body supersede it. This separation is perceived to be a failing of the ICAI, as was exposed in recent cases of accounting frauds.
(About the Author– Author was Member of ICAI- Capacity Building Committee 2010-11 and ICAI- Committee For Direct Taxes 2011-12 and can be reached at email firstname.lastname@example.org or on phone Phone: 0 1 2 1-2 6 6 1 9 4 6. Cell: 9 8 3 7 5 1 5 4 3 2 having office at 1 1 5, Chappel Street, Meerut Cantt, UP, INDIA)