PNB fraud: Global accounting firms under lens

The Centre may consider setting up of a three-member experts committee to look into the issue of regulating the multinational accounting firms (MAFs) operating in India, the Supreme Court said on Friday.

The apex court observed that absence of “revisiting and restructuring oversight mechanism” to regulate such accountancy firms might have an adverse impact on the chartered accountancy profession and unchecked auditing bodies could also adversely affect the economy of the country.

The court said the Centre could consider steps for effective enforcement of the provisions of the Foreign Direct Investment (FDI) policy and the Foreign Exchange Management Act (FEMA) regulations.

“Absence of revisiting and restructuring oversight mechanism as discussed above (in the judgement) 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,” the court said in a 75-page judgement.

The court's order came on two petitions, including the one filed by NGO Centre for Public Interest Litigation (CPIL), which had alleged that foreign accountancy firms were practising in India in violation of law. The NGO had also sought a probe against foreign accountancy firms operating in India for allegedly indulging in financial irregularities and fudging of accounts.

It noted that according to reports of the study group and expert group, enforcement mechanism was not adequate and effective and these aspects were required to be looked into by the experts in the government. The court referred to two laws of the USA in this regard and said the committee may also consider the need for an appropriate legislation 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 (in the judgement), apart from any other material," it said. "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 Union of India may take further action after due consideration of such report."

It also said that the Institute of Chartered Accountants of India (ICAI) might further examine all the related issues at appropriate level within three months and take steps as considered necessary.

The bench observed that it appreciated that it was for the policy makers to take a call on the issue of "extent to which globalisation" could be allowed in a particular field and the conditions, subject to which the same can be allowed.

"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," it said.