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TMI Blog2018 (2) TMI 1501X X X X Extracts X X X X X X X X Extracts X X X X ..... atutory provisions and policy framework effective enforcement of which has to be ensured. Statutory regulatory provisions intended to advance the object of law have to be enforced meaningfully. No vested interest can flout the same by manifesting compliance only in form. Compliance has to be in substance. The law enforcing agencies are expected to see the real situation. As found by the Expert Committee in its report, there is a compliance by MAFs only in form and not in substance, by having got registered partnership firms with the Indian partners, the real beneficiaries of transacting the business of chartered accountancy remain the companies of the foreign entities. The partnership firms are merely a face to defy the law. The principle of lifting the corporate veil has to apply when the law is sought to be circumvented. Absence of revisiting and restructuring oversight mechanism as discussed above may have adverse effect on the existing chartered accountancy profession as a whole on the one hand and unchecked auditing bodies can adversely affect the economy of the country on the other. Moreover, companies doing chartered accountancy business will not have personal or indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent and the Writ Petition filed directly in this Court is: 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. The Pleadings 3. Briefly, the averments in the High Court writ petition are: The MAFs are illegally operating in India and providing Accounting, Auditing, Book Keeping and Taxation Services. They are operating with the help of ICAFs illegally. 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 ICAI. Reference has been made to the Report dated 15th September, 2003 of Study Group of the ICAI on the subject (hereinafter referred to as Study Group Report ). 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 liberalization policy and signing of GATT by India. It was noted that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) may be required to adhere to bench mark in regard to audit procedures, quality standards etc. Decision making and real control should be with Indian firms. Number of audits qua each partner should be fixed. Mentioning of affiliation with any person not member of ICAI may amount to advertising which was not permissible. It could be permitted if entities were registered with ICAI. It was also suggested that concept of Multi disciplinary firms was required to be explored for rendering integrated service with suitable safeguards. Steps to upgrade knowledge were also suggested. However, it was suggested that commercial presence of MAFs should not be allowed de facto or de jure . Reference was made to Surbanes Oxley Act, 2002 in USA making a foreign public accounting firm preparing audit report to be accountable to the Public Company Accounting Oversight Board and the Securities and Exchange Commission. Thus, MAFs could not be allowed without registration with ICAI. Non Indian CAs should not authenticate any financial statement of any Indian entity. MAFs claim to provide audit services through affiliates amounts to indirect entry in India without requisite reciprocity for Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ICAI in the form of a status report filed before the High Court is that 161 out of 171 firms were examined by the High Powered Committee in pursuance of report of the Expert Group dated 29th July, 2011 with regard to alleged violations and some of the cases were referred to the Director (Discipline) for further action. Remaining 10 firms were in the process of being examined. Thus, the ICAI has already taken action on its part. 8. The High Court observed that in view of the stand of the ICAI, no further action was necessary and disposed of the writ petition. 9. In the writ petition filed directly in this Court, apart from the averments noted above, it has been stated that 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nancial Year ended March, 2010 is reflected in the balance sheet and profit and loss account of the PwCPL. Receipt of ₹ 7.97 crores is reflected in the balance sheet and profit and loss account of Dalal Shah, Mumbai. This apart, approximately ₹ 210 crores was received by PwCPL, Price Waterhouse (PW) and Lovelock and Lewes (LL). However, no action was taken for receipt of these sums in violation of law. A sum of ₹ 41 crores was received by Price Waterhouse Company, Kolkata to acquire another audit firm, Dalal Shah, Mumbai through a circuitous route by giving interest free loans to its four partners to enable them to invest the said amount in Dalal Shah, Mumbai in violations of the RBI Guidelines, FEMA policy and ICAI Regulations. 11. There is also violation of Companies Act. Insurance premium has been paid by three firms of PwC for benefit of other member firms which is illegal. Lovelock and Lewes (LL), a member firm of PwC India failed to point out the high level of NPAs, in its audit report, resulting in Global Trust Bank (GTB) being forced to merge with Oriental Bank of Commerce in 2004. This happened due to accumulated losses of GTB. LL was also foun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngfisher Airlines) for which action ought to be taken. (vi) SFIO and CBI have found PwC guilty. Still, the PwC firms have not been prosecuted and have been awarded Government contracts such as GST Suvidha Provider for GST Network, consultancy contract by the Kerala Government for preparing master plan to connect Kochi with industrial corridor of south India. 14. The prayers of the petitioners on above basis are: (a) ICAI must take immediate action for deregistration of these firms in terms of their own report of 2011 which they had themselves accepted. (b) These audit firms ought to be prosecuted for offences under the Chartered Accountants Act, 1949. (c) PwC firms ought to be prosecuted under FEMA, 1999 regarding the payment of ₹ 240 crores and ₹ 42 crores by the ED. (d) PwC Kolkata firm and partners need to be prosecuted under the Benami Transactions (Prohibition) Act. (e) Investigation and action on part of ICAI and Ministry of Corporate Affairs with regard to the falsification of accounts and wrong accounting of the insurance policy of ₹ 280 crores that was utilized by PwC Bangalore without paying any premium. (f) A CBI inves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 16. It was noted that some of the MAFs are active in India and are rendering services which are provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 171 names of firms but 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 give the details. 18. The group considered network groups as A to D . With regard to A , it was observed that the multinational entity had permitted the participating firms in the network to use the brand name. The relationship between members and firms and how these are governed from the same offices under common management and control was not disclosed. The linkage was clear from the data disclosed on the website. Firms received financial grants from non-CA firms contrary to the prohibition for the members of the Institute to receive any part of profits from non-member of the Institute. The networking firms have made remittances to a multinational entity, sharing their revenue purportedly towards subscription fees, technology cost and administration cost etc. However, the break-ups of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king more than the prescribed work leading to deterioration of quality of performance. 23. 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. 24. The group noted that firms have names identical to the names of MAFs operating in India but in absence of complete data, a conclusive finding could not be recorded as to violation of the CA Act with regard to sharing of fees or profits with non-members, securing business through solicitation/publicity. International affiliations with entities which do not follow the same Code of Ethics as applicable to Indian CA firms vitiate the level playing field with other Indian CA firms. Control of the Indian CA firm is effectively placed in the hands of non-members/companies and foreign entities. 25. Some of the observations in the report are: 4.2 The Council of ICAI has deliberated that some of the MAFs are active in India and are rendering services such as assurance services, taxation services, etc. normally provid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices are provided in a regulated manner. 4.5 In certain cases, joint venture agreements, MOUs, foreign collaboration agreements, shareholders agreements, private equity participations and side letters are exchanged between parties mandating appointment auditors as prescribed by international parent. In certain cases public sector undertakings, Government departments/Central and State Governments advertise for various professional services wherein the basic eligibility requirement tends to favour Multinational Network Accounting firms or other corporate entities. It has also been observed that auditors have been replaced by Indian CA firms networked with Multinational Network Accounting firms apparently for no professional reasons. 4.6 The ICAI has been pursuing with the accounting bodies in different countries for recognition of its qualification and relaxation for its members for entry level requirements like appearance in certain papers such as accounting, auditing as well as training requirements giving due credit to the ICAI s educational and training curriculum. In addition, the Indian Chartered Accountants face various invisible/non-professional barriers like visa, ci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-3) in India but also through service providers in India particularly for those services like auditing which cannot be rendered by them under the relevant laws of the country. xxx 4.16 The 171 firms from whom documents/details were called for by and large furnished the documents that were called for. However, certain CA firms have 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. The financial details were asked with a view to confirm compliance of these firms with the code of ethics in regard to sharing of fees, inward and outward remittances, nature of expenses, financial dealing with non-members, nature of payment, nature of revenue sharing of fees belonging to non-members and to identify activities not permitted within the framework of the Chartered Accountants Act, 1949, other laws including Foreign Exchange Management Act, 1999 and Foreign Contribution (Regulation) Act, 1976, Code of Ethics and Conduct. Masking/omission of certain portions was construed as non-compliance with the directions of the Insti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons framed thereunder and Code of Ethics. The firms in Network A have also not furnished any data in support of their claim that the money remitted by them to the multinational entity is in respect of above matters only and that the same in no way relates to the volume of business generated through the efforts of the multinational entity and through use of brand name. A total and full disclosure in this regard has not been made in spite of repeated directions by the High Powered Committee/Group on the basis of directions of the Council. (vi) The Verein document lay an obligation on the member firms in Network A to make every reasonable effort to refer clients to other member firms . A member of the Institute is prohibited from securing any professional business by means which are not open to a Chartered Accountant. However, they are required to follow the networking guidelines of the Institute. Such an act on the part of a member/firm seems to be in violation of Item (S) 1 of Part I of the First Schedule to the Chartered Accountants Act, 1949. (vii) The networking firms in Network A and all their personnel are using the domain name identical to the name of the multinationa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of training on secondment. xxxx 5B.7Observations : (i) The CA firms in Network B 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 the visiting cards. This clearly supports holding out by these firms in Network C that they are part of the international Network C of MAFs. Some of these firms operate from the same premises from where their international affiliate also operate. They share the same telephone and fax nos. thus establishing that they are one and the same. The Indian firms in Network B and MAFs are de facto the same entities providing assurance, management and related services and as such their operations seem to circumvent the provisions of the Chartered Accountants Act, 1949 and Regulations framed thereunder. A member of the Institute is prohibited from disclosing his affiliation with any international entity. In this regard, the Council, at its 172nd meeting held in January, 1995, while agreeing with the recommendation of the then Committee on Ethical Standards and Unjustified Removal of Auditors that the use of expression/words, In Association with .. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement of training on secondment. (iv) The obligations set out in respect of the CA firms in Network B 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. xxxx 5C.4 Observations : (i) The CA firms in Network C have amounts to the multinational entity, which they claim to be on account of actual and allocable cost for activities and services provided, however, the firms have not provided break up/computation and whether the cost includes cost towards marketing, publicity and advertising of the products and services in India as well as abroad and any other cost which is not allowed as per the Chartered Accountants Act, 1949, Regulations framed thereunder and Code of Ethics. The firms in Network C have also not furnished any data in support of their claim that the money remitted by them to the multinational entity is in respect of above matters only and that the same in no way relates to the volume of business generated through the efforts of the multinational entity and through use of brand name. A total and full d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same entities providing assurance/management and related services and as such their operations seem to circumvent the provisions of the Chartered Accountant Act, 1949 and Regulations framed thereunder. A member of the Institute is prohibited from disclosing his affiliation with any International entity. In this regard, the Council, at its 172nd meeting held in January, 1995, while agreeing with the recommendation of then Committee on Ethical Standards and Unjustified Removal of Auditors that the use of expression/words, In Association with .. , Associates of , Correspondents of etc. on the stationery, letter-heads, visiting cards and professional documents of the firm of CAs, was not permissible in view of the provisions of Item (7) of Part I of the First Schedule to the Chartered Accountants Act, 1949, decided that it should not be permitted irrespective of whether the name sought to be used is the name of an Indian firm or a foreign firm. (vi) As per the Name License Agreement, the CA firm in Network C shall be liable for and will indemnify the Business Trust against any and availability, loss, damage, cost, legal cost and other expenses of any nature suffere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f human resources; however, it has not been possible to ascertain whether the articled assistants are assigned to a member, whose obligation is to train them. As such, the articled assistants cannot be allowed to be utilized by any other member. However, to address this issue/there exists a provision under Regulation 54 of the Chartered Accountants Regulations, 1988 enabling secondment assistants with a view to provide the articled assistants the opportunity of gaining practical experience in areas where the principal may not be in a position to provide the same. Such secondment is allowed under the Regulations with certain restrictions and conditionalities and the same is required to be sent to the Institute for records within thirty days from the date of commencement of training on secondment. (iv) One of the network firms in Network D, though is yet to sign the agreement with the multinational entity, but has already been operating as part of the multinational entity s network and complies with the obligations. (v) The amount of remittance made by firms in Network D to the multinational entity (exceeding Rs.XXXX million in a year) has been disclosed. However, the firms ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aving international affiliations are subject to regulatory jurisdiction of ICAI and are required to follow the Code of Ethics applicable to Chartered Accountants in India. However, due to the dichotomy of other entities operating in close association with the Indian CA firms, often permitting common brand name/using of logos, coupled with leveraging on international resources etc., is vitiating the level playing field with other Indian CA firms. 6.4 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. The desirability of such a practic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is client or otherwise than as required by any law for the time being in force. The auditors, by allowing the audit to be conducted by an unauthorized firm, without the consent of the client, which was not appointed as the statutory auditors, may have allowed all information relating to the audit being passed on to the said firm, thus breaching the aforesaid Item, for which both the firms which were appointed and the one which carried out the audit, may be in violation of the Code of Ethics. 6.8 In response to Institute s letter, some firms have furnished details/documents after masking or eliminating certain portion such as financial figures, profit sharing ratio, capital contribution etc. The Institute has sent numerous letters to these CA firms for providing the information particularly, copies of agreements/contracts they have with their international affiliates/networks with complete annexures, partnership deed with complete annexures and schedules mentioned therein, assessment orders and/or tax returns, financial statements i.e. income and expenditure statement, balance sheet or statement of affairs including tax audit reports. As stated earlier, most of the firms have sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t given the full information; 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; action should be considered against the firms who had received financial grant from the multinational entities in spite of prohibition against the CA firms. A member is not allowed to accept any share, commission or brokerage from a non-member unless such non-member is a member of a professional body with prescribed qualifications. Further recommendation is that action 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; require the CA firms to maintain necessary data about the remittances made and received on account of networking arrangement or sharing of fee; consider action against firms being paid or offered referral fee; it should be made mandatory for all firms who enter into any kind of affiliation/arrangement with any foreign entity to disclose their international affiliation/arrangement every year to the Institute; Council should co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Audit and Governance under the chairmanship of Shri Naresh Chandra which examined the Auditor-Company relationship and disciplinary mechanism for the Auditors. Amendment was proposed by the Council of the Institute to establish a Disciplinary Directorate headed by Director (Discipline). 28. In response to the grievance that no action was taken against PwCPL and their network audit firms in India, the ICAI submitted that its Disciplinary Directorate had already taken cognizance of the information in the Article dated 17th January, 2012 in the Times of India Sundry Income cushions PwC India . Letter dated 9th March, 2012 was written to PwC, New Delhi, Chennai, Bangalore, PwC, Kolkata, LL, Kolkata. A letter was also written to RBI. The stand of the PwC firms, was that news item did not make any reference to their firms and no clarification was necessary. PwC, Kolkata submitted that it was member of PwC network of firms around the world ( PwC Network ). To maintain the quality standards of all members, a grant of ₹ 65 crores was given to them by the PricewaterhouseCoopers Services BV during the financial year ended 31st March, 2011 as an outright, non refundable grant. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that there is no allegation against it in the SLP. All the partners of Respondent No.5 were Indians and the firm was also registered with the ICAI. An expert group was constituted by the Ministry of Corporate Affairs which gave its report dated January 31, 2017 to the effect that Big six firms (MAFs) were not operating directly. Their network partners were rendering audit services. Indian network firms pay global network charges to their parent organization towards sharing common global costs of human resources and other infrastructure, technology cost. This is a standard practice across jurisdictions. It does not make MAFs subject to the control by the global parent. MAFs cannot be considered as multinational entities as there is no foreign control through ownership or management. Network partners are run, controlled and managed by Indian nationals. It was submitted the writ petition was not maintainable. 30. Reference has also been made to letter dated 3rd July, 2017 addressed to the Secretary, Ministry of Corporate Affairs from the PMO, with reference to the said expert group incorporating the conclusions of the expert group as follows: a) The accounting and a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entities. Services BV works on no profit no loss basis. Network charges are paid by all member entities including the Indian member entities. The network felt the need of enhancing the standards and capacity of Indian network entities for which non refundable grants were provided. The grants are not in the nature of investment. These are current account transactions and not capital account transactions. For FY 2009-10, the grants were taxed but network charges paid to Services BV were disallowed as deduction. For FY 2010-11 assessment order has been passed on 29th September, 2016 against which appeal was pending. 32. The Enforcement Directorate (ED) sought information in respect of funds received from outside India. In March and August, 2016, ED issued summons. In July, 2017, ED again issued summons under Section 37 of FEMA seeking details of inward/outward remittances. In August, 2017, the Chief Financial Officer (CFO) was issued summons by the ED to provide information about the remittances. 33. The Registrar of Companies issued notices to show cause why prosecution should not be launched against the Directors and Company Secretary of the PwCPL in January, 2013. Company Law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re registered with ICAI, they are personally accountable to the ICAI for any professional misconduct. Services BV does not have any stake in the partnership or profits of the firms. Thus, there is no violation of Section 25 of the CA Act. Stand of Central Board of Direct Taxes (CBDT)/ED 40. Stand taken by the CBDT is that on receipt of letter dated 1st July, 2013 from the Advocate for the petitioner, investigation was conducted by the Director General of Income Tax (Investigation) (DGIT) with regard to the income tax implications. It was found that 11 entities belonging to the PwC Group are operating in India. Four entities have received grants of ₹ 477.64 crores from PwC Services BV during the period 2009 to 2013. The grants are of two types professional capacity building and business expansion. ₹ 416.39 crores are offered for tax which were taxed for professional capacity building as sundry income . The balance was claimed as capital receipt for expansion of business. The Assessing Officer made assessment of tax and proceedings were pending. According to ED, investigation in the matter is pending, though number of witnesses have been examined. Stand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of sub-section (1), 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. 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 any 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. [29A. Power of Central Government to make rules. (1) The Central Government may, by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agrees to accept any part of the profits of the professional work of a person who is not a member of the Institute: Provided that nothing herein contained shall be construed as prohibiting a member from entering into profit sharing or other similar arrangements, including receiving any share commission or brokerage in the fees, with a member of such professional body or other person having qualifications, as is referred to in item (2) of this Part; (4) enters into partnership, in or outside India, with any person other than a chartered accountant in practice or such other person who is a member of any other professional body having such qualifications as may be prescribed, including a resident who but for his residence abroad would be entitled to be registered as a member under clause (v) of sub-section (1) of section 4 or whose qualifications are recognised by the Central Government or the Council for the purpose of permitting such partnerships; (5) secures, either through the services of a person who is not an employee of such chartered accountant or who is not his partner or by means which are not open to a chartered accountant, any professional business: Provided th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hall disentitle a chartered accountant from being a director of a company (not being a managing director or a whole time director) unless he or any of his partners is interested in such company as an auditor; (12) allows a person not being a member of the Institute in practice, or a member not being his partner to sign on his behalf or on behalf of his firm, any balance-sheet, profit and loss account, report or financial statements. PART II Professional misconduct in relation to members of the Institute in service A member of the Institute (other than a member in practice) shall be deemed to be guilty of professional misconduct, if he being an employee of any company, firm or person (1) pays or allows or agrees to pay directly or indirectly to any person any share in the emoluments of the employment undertaken by him; (2) accepts or agrees to accept any part of fees, profits or gains from a lawyer, a chartered accountant or broker engaged by such company, firm or person or agent or customer of such company, firm or person by way of commission or gratification. PART III Professional misconduct in relation to members of the Institute generally A membe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m has a substantial interest; (5) fails to disclose a material fact known to him which is not disclosed in a financial statement, but disclosure of which is necessary in making such financial statement where he is concerned with that financial statement in a professional capacity; (6) fails to report a material misstatement known to him to appear in a financial statement with which he is concerned in a professional capacity; (7) does not exercise due diligence, or is grossly negligent in the conduct of his professional duties; (8) fails to obtain sufficient information which is necessary for expression of an opinion or its exceptions are sufficiently material to negate the expression of an opinion; (9) fails to invite attention to any material departure from the generally accepted procedure of audit applicable to the circumstances; (10) fails to keep moneys of his client other than fees or remuneration or money meant to be expended in a separate banking account or to use such moneys for purposes for which they are intended within a reasonable time. PART II Professional misconduct in relation to members of the Institute generally A member of the Institut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ship concern or any association of persons in India. The application will be decided in consultation with the Government of India. Consideration of the Issue 44. The above resume of facts and pleadings shows the following: i) There is a bar under CA Act to practice as CAs for a company which includes a limited liability common partnership which has company as its partners. ii) Code of Conduct for the CAs prohibits fee sharing, advertisements but the MAFs by using international brands and mixing other services with the services to be provided as part of practice of chartered accountancy violate the said Code of Conduct for which there is no regulatory regime as the MAFs do not register themselves with ICAI. Indian firms using similar brand names are registered with the ICAI but the real entities being MAFs, ICAI is unable to take requisite action for violation of Code of Ethics by the MAFs. Thus, revisit of existing legal framework may become necessary so as to have an oversight mechanism to regulate MAFs on the touchstone of Code of Ethics. iii) Need for amendment of law to separate regulatory regime for auditing services on the pattern of Sarbanse Oxley Act en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. The ICAI has initiated action with regard to foreign remittances and is said to have written a letter dated 19th March, 2012 to the RBI to enquire whether investigation was conducted by the RBI. However, according to ICAI, its investigation can only be in respect of members, registered with it, for the misconduct conducted by them. 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 common brand name by the network firms is in violation of reciprocity stipulated under Section 29 of the CA Act. The ICAI should have taken the matter to logical end, by drawing adverse inference, if information was withheld by the concerned groups. 47. No doubt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s for the policy makers to take a call on the issue of extent to which globalization could be allowed in a particular field and conditions subject to which the same can be allowed. Safeguards in the society and economy of the country in the process are of paramount importance. This Court may not involve itself with the policy making but the policy framework can certainly be looked at to find out whether safeguards for enforcement of fundamental rights have been duly maintained. 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. Statutory regulatory provisions intended to advance the object of law have to be enforced meaningfully. No vested interest can flout the same by manifesting compliance only in form. Compliance has to be in substance. The law enforcing agencies are expected to see the real situation. As found by the Expert Committee in its report, there is a compliance by MAFs only in form and not in substance, by having got registered partnership firms wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 52. Absence of revisiting and restructuring oversight mechanism as discussed above may have adverse effect on the existing chartered accountancy profession as a whole on the one hand and unchecked auditing bodies can adversely affect the economy of the country on the other. Moreover, companies doing chartered accountancy business will not have personal or individual accountability which is required. Persons who are the face may be insignificant and real owners or beneficiary of prohibited activity may go scot free. 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. It may consider whether on the pattern of the Sarbanse Oxley Act corporate leaders be required to personally certify the accuracy of the financial statements. Further, how to prevent corporate analysts from benefitting from the conflict of interests, how to check audit companies from providing non audit services and how to lay down protocol for auditors. It has also been brought to our notice that another law in US Dodd-Frank Wall Street Reform and Consumer Protection Act, 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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