The Supreme Court on Friday asked the Centre to constitute within two months an expert committee to look into the functioning of Multinational Accounting Firms (MAFs) in the country and to put in place a law for oversight of the profession of auditors. The committee must submit its report from three months of its constitution which can then be acted upon by the government, the court ordered. “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 (Chartered Accountants) Act (1949) and the statutory Code of Conduct for the CAs requires revisit so as to appropriately discipline and regulate MAFs,” a bench of Justices A K Goel and U U Lalit ruled while disposing of two petitions — an appeal against a Karnataka High Court order and a writ petition filed by an NGO, Centre for Public Interest Litigation.

Section 25 of the Act prohibits companies whether incorporated in India or elsewhere from chartered accountancy practice. Section 29 says that no subject of a specified country which prohibits persons of Indian domicile from becoming members of any institution similar to ICAI or practicing the profession of accountancy in that country, shall be entitled to become a member of ICAI or practice the profession of accountancy in India.

The court said that 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 Sarbanes Oxley Act, which was passed following the Enron scandal in the year 2000, requires corporate leaders to personally certify the accuracy of their company’s financials. The Act also lays down rules for functioning of audit companies with a view to prevent the corporate analysts from benefiting at the cost of public interest. It also prohibits audit companies from providing non audit services to companies whose audits were conducted by such auditors.

The bench pointed out that “the absence of adequate oversight mechanism has the potential of infringing public interest and rule of law which are part of fundamental rights under Articles 14 and 21.” The order said “While we appreciate that it is for the policy makers to take a call on the issue of extent to which globalisation 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.” On allegations that MAFs were violating the country’s laws, it added, “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 bench said there appeared to be a need to separate auditing business from consultancy business to ensure independence of auditors. Accounting firms could not be left to self regulate, it added.

The court said that the proposed Committee may examine “the question whether on account of conflict of interest of auditors with consultants, the auditors’ profession may need an exclusive oversight body”.

The Committee must look into the 2011 report of the ICAI Expert Study Group on Operation of Multinational Network Accounting Firms (MAFs) in India and the September 2003 report of the ICAI Study Group which examined attempts of MAFs to operate in India without formal registration with the ICAI and without being subject to any discipline and control in the wake of the liberalisation policy and India signing GATT. “It may also consider steps for effective enforcement of the provisions of the FDI policy and the FEMA Regulations…It may identify the remedial measures which may then be considered by appropriate authorities,” the court said.

Friday’s judgment asked the Enforcement Directorate to complete the pending investigations into allegations of violations of RBI guidelines by auditing firm Price Waterhouse within three months.

SEBI has accepted the report of Kotak committee for mandatory Secretarial Audit of Listed Companies and their material Subsidiaries.

Congratulations to the whole fraternity on this extended opportunity and resposibility..

#brandICSI#proudCS#opportunities

After lengthy arguments court allowed petitioners before court who are not seeking revival of their company, to participate in CODS 2018 and file requisite docs with ROC in physical form by 31.3.2018.

Further fee of Rs. 30000+other charges shall be submitted with registry of high court by 7.4.2018. Further din of petitioners shall be activated till next date of hearing.

Further benefit of cods to such companies/petitioners shall be subjected to outcome of the writ which are now listed for final argument on 24.7.2018.

To cut short following are the directions:

A. DIN of petitioners are activated till next date of hearing i.e. 24.7.2018;

B. All the pending documents/returns need to filed with ROC by 31.3.2018 in physical form;

C. Requisite fee under CODS i.e. INR 30,000 + other charges to be submitted with Registry of High Court by 7.4.2018 in the form FDR valid for 6 months along with calculation sheet

Parliament passes payment of gratuity bill -The legislation will enable the government to enhance the ceiling of tax free gratuity to Rs 20 lakh from the existing Rs 10 lakh for employees falling under the Payment of Gratuity Act.

It also allows the government to fix the period of maternity leave for female employees as deemed to be in continuous service in place of the existing 12 weeks.

SC, in a detailed 75 pages judgment, lifts corporate veil of Multinational Accounting Firms (MAFs), holds that MAFs violate CA Act, orders further investigation by Enforcement Directorate & examination by ICAI, to probe violation of RBI/FDI policies and the CA Act; SC further calls for establishment of a separate oversight body for auditors, on the lines of PCAOB in USA ; Division bench of Justice Adarsh Kumar Goel and Justice Uday Lalit makes scathing observations on the conduct of MAFs in India, notes that “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.”;

Calling for MAFs to comply with Indian regulatory laws in “substance”, SC rules that “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.”; Further concluding that the *partnership firms in India with MAFs affiliations are merely a face to defy the law,* Apex Court asserts that *”The principle of lifting the corporate veil has to apply when the law is sought to be circumvented.”*;

Court frowns on MAFs violating ethics, which does not permit profit sharing or complying with ceiling limit for the business, which the MAFs circumvent vide sub-contracts/outsourcing; SC observes “If the premises are same, phone number/fax number is same, brand name is same, the controlling entity is same, human resources are same, it will be difficult to expect that there is full compliance on mere separate registration of a firm… The prohibition under Section 25 of the CA Act can be held to be defeated…”; On investments by MAFs in Indian affiliate entities through interest free loans to partners, SC terms it as “circuitous route”, further notes that “the policy of law cannot be defeated by terming such investment as grant for quality control specially when the grant has been used to acquire a chartered accountancy firm.”; SC criticizes ICAI for adopting an “hyper-technical” approach in its investigation of MAFs and submitting to the Court that though MAFs were involved in violating ethics and law, the MAFs were not amenable to ICAI’s disciplinary jurisdiction;

*On ICAI’s role, SC observes “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.”; SC further calls for establishment of a separate oversight body for auditors*, on the lines of PCAOB in USA, expresses concern in following words “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.* Such oversight mechanism needs to be revisited from time to time…”;

*SC also calls for necessity to separate auditing business from consultancy business to ensure independence of auditors;*

*Finally, SC issues 3 directions, namely*

*i) for Union Govt. to constitute a 3 member Committee of Experts to look into the issue of revisiting the CA Act to appropriately discipline & regulate MAFs and to consider on the lines of the US law – Dodd Frank, the need for an appropriate mechanism for oversight of auditors.*

*ii) The ED shall complete the pending investigations within 3 months.*

*iii) ICAI to examine related issues within 3 months:* SC

*The judgment was delivered by division bench comprising of Justice Adarsh Kumar Goel and Justice Uday Umesh Lalit.*