February 25, 2018

Supreme Court asks Centre to set up 3-member expert panel to review legal framework

An oversight mechanism to regulate multinational accounting firms (MAFs) on the touchstone of ethics is finally on the cards.

The Supreme Court has asked the Centre to set up a 3-member expert panel to decide whether and to what extent the current legal framework needs revisit so as to appropriately discipline and regulate MAFs for violation of code of ethics and reciprocity provisions of the Chartered Accountants Act.

In a 75-page landmark judgment, the apex court Bench of Justices A K Goel and U U Lalit also ruled that the expert committee may consider the need for an appropriate legislation for the oversight of profession of auditors.

The law could be patterned on the Sarbanes Oxley Act 2002 and the Dodd Frank Wall Street Reform and Consumer Protection Act 2010 in US or any other appropriate mechanism, the Bench suggested disposing of two petitions -- an appeal against a Karnataka High Court order and a writ petition filed by a NGO, Centre for Public Interest Litigation.

The Bench also said that accounting firms could not be left to self-regulate themselves and the issue of separate oversight body for auditing work and updating the existing legal framework appear to be necessary.

The apex court felt that it appears necessary to realise that auditing business is required to be separated from the consultancy business.

The Bench also wants the Government appointed expert panel to examine the question whether on account of conflict of interest of auditors with consultants, the auditors' profession may need an exclusive oversight body.

 The Centre has been tasked to set up the 3-member expert committee within two months. Report of the committee may be submitted three months thereafter, the Supreme Court has said.

The Bench also faulted the CA Institute for not taking appropriate action to uphold the law although its committee of experts had in July 2011 itself concluded that MAFs were involved in violating ethics and law.

"The ICAI ought to constitute an expert panel to update its enquiry", the Supreme Court has said.

Petitioners' case

The main point was that the principle of reciprocity under Section 29 of the CA Act, Section 25 prohibiting corporates from chartered accountancy practice and code of ethics prohibiting advertisement and fee sharing are flouted by MAFs.

MAFs also violate FDI policy in the field of accounting, auditing, book keeping, taxation and legal services, they submitted.

It was contended that MAFs are illegally operating in India with the help of Indian chartered accountancy firms and providing accounting, auditing, book keeping and taxation services.

It was being argued that no effective steps were being taken to enforce the law in force although the MAFs are operating in India in violation of law in a clandestine manner.

[The Hindu Business Line]