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.