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REPORTABLE

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE/ORIGINAL JURISDICTION

CIVIL APPEAL NO. 2422    OF 2018 (ARISING OUT OF SPECIAL LEAVE PETITION (CIVIL) NO.1808 OF

2016)

S. SUKUMAR  …APPELLANT

VERSUS THE SECRETARY, INSTITUTE OF CHARTERED  ACCOUNTANTS OF INDIA & ORS.         ...RESPONDENTS

WITH

WRIT PETITION (CIVIL) NO. 991 OF 2013

CENTRE FOR PUBLIC INTEREST LITIGATION     …PETITIONER

VERSUS UNION OF INDIA & ORS.             ...RESPONDENTS

J U D G M E N T   

ADARSH KUMAR GOEL, J.

1. Leave granted in SLP (Civil) No.1808 of 2016 filed against the

order dated 3rd August, 2015 of the High Court of Karnataka in Writ

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Petition  No.17959 of  2012.   The  petition  before  the High Court

sought  direction  for  exercise  of  power  under  Section  21  of  the

Chartered Accountants Act, 1949 (‘CA Act’) to initiate investigation

against  Multi-National  Accounting  Firms  (MAFs)  and  Indian

Chartered  Accountancy  Firms  (ICAFs)  having  arrangement  with

such MAFs for breach of Code of Professional Conduct under the CA

Act  and  also  to  take  penal  action  by  way  of  cancellation  of

permission  granted  to  them  by  the  Institute  of  Chartered

Accountants of India (ICAI).  Since the issue raised in Writ Petition

(Civil)  No.991 of  2013 is  identical,  both the matters  have been

heard together. In the Writ Petition, some other connected issues

have  also  been  raised  to  which  reference  will  be  made  in  due

course.   

The Issue

2. The issue raised in the appeal arising out of Karnataka High

Court Judgment 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.

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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 bodies corporate formed for

management consultancy services were being used as a vehicle

for  procuring  professional  work  for  sister  firms  of  Chartered

Accountants (CAs).  Members of ICAI were associating with such

bodies  as  Directors,  Managers  etc.  to  provide  escape  route  to

MAFs.  CA functions must be discharged by animate persons and

not in anim bodies.

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4. The concerns of various segments of CAs noted by the Study

Group are :

“(a) Sharing fees with non-members;

(b) Networking and consolidation of Indian firms;

(c) Need to review the advertisement aspect;  

(d) Multi disciplinary firms with other professionals;

(e) Commercial  presence  of  multi-national accounting firms;

(f) Impact  of  similarity  of  names  between accountancy firms and MAFs/Corporates engaged in MSC-Scope for reform and regulation;

(g) Strengthening knowledge base and skills;

(h) Facilitating  growth  of  Indian  CA firms  & Indian CAs internationality;

(i) Perspective of the Government, corporate world and regulatory bodies and role of ICAI in shaping the view;

(j) Introduction of joint audit system;

(k) Recognition of qualifications under Clause (4) of Part  I  of  the  First  Schedule  to  the  Chartered Accountants  Act,  1949  for  the  purpose  of promoting  partnership  with  any  persons  other than the CA in practice within India or abroad;

(l) Review  the  concept  of  exclusive  areas  for  the keeping  in  view  the  larger  public  interest involved so as to include internal audit within it;

(m)  Conditionalities  prescribed  by  certain  financial institutions/Governmental  agencies  insisting appointment  of  select  few  firms  as auditors/concurrent auditors/consultants for their borrowers.”

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5. The Study Group considered whether goal should be to focus

on ethics or growth of the profession with Code of Ethics being

guiding points and not barriers.  Further issues were what should

be the regulatory regime; whether networking could be allowed to

benefit  Indian  CAs;  whether  MAFs  may  be  required  to  furnish

particulars about their ownership, persons responsible and other

financial particulars.  It was noted that the Code of Ethics under

First Schedule to the CA Act prohibits sharing of fee with persons

other  than  members  of  the  ICAI.  Only  cost  for  obtaining

assistance/advice to international affiliates could be given.  Indian

Firms with International Affiliates (IFIA) 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

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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 Indian accountancy firms.  It was

suggested that  even where MAFs affiliate with Indian CA,  same

brand should not  be allowed as in other services.  Use of  name

identical  to  MAFs  was  brand  building  exercise  which  gave

impression that Indian CA firm was not independent.  Separation of

identity  was  a  must.   Use  of  statutory  visiting  cards  etc.  must

display  separation  of  identity.   Under  collective  label  of

management  consultancy  services,  CA  services  should  not  be

allowed as Code of Ethics for auditors cannot be enforced in this

manner.   Audit  cannot  be  done  in  non  professional  way.

Advertisement  and  publicity  was  harmful  to  the  cause  of  the

profession so that user relies only on real worth of services.  It is

further noted that though the CAs are not allowed to share fees or

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profits with anyone other than a member of the institute, some of

the  members  were  lending  their  names  to  the  MAFs  who  are

non-members and enabling them to illegally operate in the field of

Chartered Accountancy  and sharing  fees  and profits  with  them.

Indian CAs have not been provided reciprocity in the countries to

which the MAFs belong as per Section 29 of the CA Act.   

6. Reference has also been made to a report  on operations of

MAFs in India dated 29th July, 2011 submitted by Expert Group of

the ICAI (for short Expert Group Report) in the wake of the ‘Satyam

Scam’, and decisions of the ICAI laying down the Code of Conduct.

The  Expert  Group  Report  noted  that  the  MAFs  are  rendering

services which are rendered by the CAs in terms of Section 2(2) of

the CA Act  such as accountancy,  auditing,  professional  services

about  matters  of  accounting  procedure,  presentation  or

certification  of  financial  facts  or  data.   The  MAFs  are

corporates/juridical  persons.   They  solicit  professional  work  in

international  brand name. They have registered Indian CA firms

with ICAI with the same brand names which are their integral part.

There is no regulatory regime for their accountability.  Thus, the

principle of reciprocity under Section 29 of the CA Act, Section 25

prohibiting  corporates  from chartered  accountancy  practice  and

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Code  of  Ethics  prohibiting  advertisement  and  fee  sharing  are

flouted.  The MAFs also violate FDI policy in the field of accounting,

auditing,  book  keeping,  taxation  and  legal  services.   Detailed

reference to the said report will be made in the later part of the

judgment.

7. The stand of 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

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(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, Bangalore

was  the  Auditor  of  the  erstwhile  Satyam  Computer  Services

Limited (Satyam) for more than eight years but failed to discover

the  biggest  accounting  scandal  which  came  to  light  only  on

confession  of  its  Chairman in  January,  2009.   The  said  scandal

attracted penalty of US Dollars 7.5 Million (approx. Rs.38 crores)

from  the  US  Regulators  apart  from  other  sanctions.  Since

certification by Auditors is  of  great importance in the matter of

payment  of  subsidies,  export  incentives,  grants,  share  of

government revenue and taxes, sharing of costs and profits in PPP

(Public  Private  Partnership)  contracts  etc.,  oversight  of

professionals engaged in such certification has to be as per law of

the land.  Accordingly, even though investigation was sought by

the  petitioner  vide  letter  dated  1st July,  2013,  no  satisfactory

investigation has been done.  

10. PwCPL  is  the  brand  under  which  member  firms  of

PricewaterhouseCoopers  International  Limited,  U.K.  (PwCIL),  an

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English private company provides professional services in respect

of audit, tax and advisory services.  ‘PwC India’ firms are network

member firms of the PwCIL.  There are 10 Audit Firms namely Price

Waterhouse  (PW),  Lovelock  and  Lewes  (LL),  Price  Waterhouse

Bangalore, Price Waterhouse & Co. Bangalore, Price Waterhouse &

Co. Kolkata, Price Waterhouse Delhi, Price Waterhouse & Co. Delhi,

Price Waterhouse & Co. Chennai, Dalal & Shah Mumbai and Dalal &

Shah  Ahmedabad,  besides  a  private  limited  company,  namely

PwCPL, who are collectively referred to as “PwC India” firms and

who operate  from various  metros  including Delhi.   Their  clients

include  Government  departments,  Public  Sector  organizations,

ministries for which huge payments are made to them.  They are

engaged in auditing/certifying statutory compliances.  They have

violated  Foreign  Direct  Investment  (FDI)  Policy,  RBI  master

circulars, FEMA Act and Rules.  According to Notification dated May

3, 2000, under Section 47(2)(h) of FEMA Act, no person resident

outside India can make investment by way of contribution to the

capital  of  a  firm or a  proprietary  concern or  any association of

persons in India without permission of the RBI.  In violation of the

said  provision,  PwC  India  entities  received  Rs.240  crores  in

Financial Year 2010-2011.  The Chairman of PwC India confirmed

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the  receipt  of  funds  from Global  Network.   Receipt  of  Rs.22.90

crores in the Financial Year ended March, 2010 is reflected in the

balance sheet and profit and loss account of the PwCPL.  Receipt of

Rs.7.97 crores is reflected in the balance sheet and profit and loss

account  of  Dalal  &  Shah,  Mumbai.   This  apart,  approximately

Rs.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  Rs.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  found  guilty  of

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manipulating share prices and falsification of accounts by Serious

Fraud Investigation Office (SFIO).  PwC has been found guilty of

accounting scandals outside India.

12. After making the above averments, the petition suggests that

falsification of accounts should be made a non-bailable offence to

ensure effective governance and to avoid potential loss of revenue

to  the  public  exchequer.   An  independent  regulator  should  be

appointed for the auditors.  Prayer has been made for investigation

into the above allegations against the PwCPL and their  network

Audit Firms operating in India sharing the brand name of PwC.   

13. To sum up, the case of the petitioners is:

(i) The MAFs violate provisions of Sections 25

and 29 of the CA Act, the Code of Conduct

laid down by the ICAI, Companies Act, the

FDI  Policy  as  highlighted  in  report  of  the

Study  Group  of  the  ICAI  dated  15th

September,  2003  and  the  report  of  the

Expert  Group  of  the  ICAI  dated  29th July,

2011.  Regulatory framework was required

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to  be  re-visited  to  cover  the  gap  in  the

existing regulatory framework and challenge

on account of operations of MAFs as noted

in  the  said  reports.  Audit  functions  were

required  to  be  separated  with  a  separate

oversight body.   

(ii) PwC Services BV, Netherlands in violation of

law,  made  investment  of  Rs.41.42  crores

through  PwC,  Kolkata  to  acquire  Dalal  &

Shah, Mumbai which is an audit firm through

a  circuitous  route  by  giving  interest  free

loans to its partners allowing them to invest

the said amount with Dalal & Shah, Mumbai.

This  is  clear  offence  under  the  Benami

Transactions (Prohibition) Act.  It is also an

offence  under  the  FEMA,  the  Chartered

Accountants Act, and RBI Master Circulars.   

(iii) The PwC Services, BV Netherlands remitted

Rs.240  crores  to  various  PwC  entities  in

India for ‘enhancement of skills’.  Payment

of Income Tax on the said amounts does not

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legalise  the  remittance.  The  remittance

shows that the foreign company has control

over  Indian  Firms  and  is  thus  indirectly

running chartered accountancy business in

India and also getting its return on the said

amount.   

(iv) There is falsification of accounts with regard

to insurance premium for a 280 crore policy

by  PwC  firms  in  India  in  violation  of

Companies Act, 1956.   

(v) PwC  is  responsible  for  the  violations  by

Satyam  scam,  failure  of  the  Global  Trust

Bank  (GTB)  and  UB  Group  (Kingfisher

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

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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  Rs.240  crores  and Rs.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 Rs.280 crores that was utilized by PwC Bangalore without paying any premium.

(f) A CBI investigation into the receipt of  Rs.240 crores so that the real purpose of such receipts is known and  necessary  action  may  be taken.

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High  Powered  Committee  Expert  Group  Report  dated  29  th

July, 2011

15. In its report dated 29th July, 2011 on Operation of Multinational

Network  Accounting  Firms  (MAFs)  in  India,  the  expert  group

constituted by the ICAI examined the issues concerning operation of

MAFs  in  India.   The  group  was  constituted  in  the  context  of

corporate  fraud of  high magnitude revealed by the statement  of

Chairman  of  Satyam.   The  ICAI  sought  curbing  of  undesirable

activities/operations of MAFs.  The Ministry held a meeting with the

representatives of the ICAI to identify the issues.  Thereafter, the

following  issues  were  referred  to  the  Expert  Group  by  the  High

Powered Committee of the ICAI:

“(a) Manner  in  which  certain  Indian  CA  firms, hold  out  to  public  that  they  are  actually MAFs  in  India,  the  manner  in  which assignments are allotted,  determination of nexus/linkage.   The  representatives  of certain  Indian  CA  firms  carry  two  visiting cards one of Indian CA firm and another of a multinational  entity.   They  represent  the multinational  entity  and  seek  work  for Indian CA firm.

(b) Name used  by  auditor  in/his  report  –  The basic question was whether the auditors of M/s.  Satyam  had  correctly  mentioned  the name of their firm in the audit report.   

(c) Terms and conditions and cost payable for use  of  international  brand  name  –  No

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international firm will allow its name to be used  by  all  and  sundry.   The  question  is what  is  the  consideration  whether  it  is determined as a percentage of fee or profits and whether it  is  within the framework of Chartered  Accountants  Act,  1949, Regulations  framed,  thereunder  Code  of Conduct and Ethics.

(d) Nature  of  extra  benefits  accrued  to  the Indian CA firms having foreign affiliation.

(e) How the MAFs placed their  foot in India – Long  back  in  a  meeting  with  RBI  it  was informed that the MAFs entered in India to set  up  representative  offices.   No documents  are  available  as  regards  the terms and conditions set out while granting them  permission  to  operate  in  India. However,  the  RBI  vide  its  letter No.Ref.DBS.ARS.No.744/08:91:008  (ICAI)/ 2003-2004  dated  23rd March,  2004  inter alia, mentioned that “RBI has not permitted any foreign audit firm to set up office or to carry  out  any  activity  in  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.

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(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 provided by CAs without registration

with the Institute.  Certain MAFs are corporate or juridical persons

with  significant  commercial  presence  in  India  and  are  rendering

assurance services.   They solicit professional work including audit

work by including international brand name in their name.  With the

same brand names certain Indian CA firms were registered with the

ICAI.  They hold out to public that they are actually MAFs in India,

whereas to the ICAI they hold out that they are purely Indian CA

firms having no relationship with foreign entities.  The government,

regulators and the ICAI must ensure that such wrong impression is

not  permitted.   Entities  other  than  CAs  in  practice  should  be

prohibited  from  providing  auditing  and  assurance  services  in

absence of their regulation under a law.  Indian CAs are not getting

mutual  treatment  in  other  countries,  while  the MAFs continue  to

operate in India through the Indian CA firms.   Entities having similar

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name as that of MAFs, which entered through automatic/FIPB route,

are rendering Chartered Accountancy services contrary to the policy

of  not  permitting  Foreign  Direct  Investment  (FDI)  in  the  field  of

accounting, auditing and book keeping services, taxation services

and  legal  services.   The  Institute  requested  the  Department  of

Company Affairs to take the following action:

“(i) for  reviewing  the  existing  situation  for ensuring reciprocal advantage in favour of the Indian accounting profession;

(ii) to take appropriate action against MAFs if found  to  be  in  violation  including cancellation/revoking/  withdrawal  the permission already granted to such foreign entities;

(iii) to  ensure  that  the  non-compliance  of  the terms  &  conditions  of  the  permission granted by the Government to such MAFs is dealt with effectively;

(iv) to  prohibit  the  MAFs/consultancy  firms which  have  set  up  commercial  presence either  as  a  corporate  entity  or  otherwise from defying the restrictions in terms of the Government  policy  both  in  letter  &  spirit; and  

(v) to ensure that the names of the companies which are same or similar to the names of MAFs should not be allowed to continue to operate in India.”

17. The Institute called for information from the Indian CA firms

perceived to be having international affiliations to examine whether

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they are functioning within the framework of CA profession.  The

exercise  resulted  in  finding out  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  costs  were  not  furnished.   The  cost

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excluded marketing, publicity and advertising which was not allowed

as per the CA Act.   The data was not furnished to support the claim

that remittances are only in respect of such matters and not related

to  the  volume  of  business  generated  through  the  efforts  of  the

multinational entities.  A total and full disclosure was not made in

spite of repeated directions. The domain name used by all the firms

in the network was identical to the name of the multinational entity

which supports the view that they hold out that these firms were

part of international network.  Some of the firms operate from the

same premises from where their international affiliate also operates.

They  share  the  same  telephone  and  fax  numbers.   They  share

human  resources  with  other  firms.   Articled  Assistants  are  also

shared without following the restrictions imposed by the ICAI.  

19. With regard to group ‘B’, the multinational entity had executed

sub-licence agreements with the Indian firms.  They stated that they

are not sharing their fees or profits with any multinational entity but

reimbursement  of  costs  relating  to  certain  central  facilities  and

levies  are  made  annually.    The  CA  firms  used  name  of  the

international  entity  in  their  E-mail  IDs.    The  E-mail  ID  and  the

domain name resembled the name of the multinational entity.  Thus,

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in the same manner, as in respect of network ‘A’ the CA firms in

network ‘B’ hold out that they are part of the international network.

They share same premises, same telephone and fax number.  They

made remittances annually to the multinational entity sharing their

revenue with  multinational  entity  which they have claimed to be

towards reimbursement of cost towards central facilities and levies.

They  do  not  provide  break-up  which  may  show  that  the  cost

included marketing, publicity and advertising.  

20. The firms in the Network ‘C’ are also using the MAF’s name as

part of domain name in their E-mail IDs, which is displayed in the

visiting cards of the partners of the firms.   

21. Similar was the position with regard to Network ‘D’.  The firms

in Network ‘D’ also used the name of multinational entity as domain

name.  

22. The Council has prescribed maximum limit for statutory audit

and tax audit which a member in practice can undertake in a year.

But,  by  sub-contracting  the  work  to  other  firms,  the  firms  are

undertaking more than the prescribed work leading to deterioration

of quality of performance.

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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  provided  by  Chartered Accountants,  without  registration  with  the  Institute and,  without  being  subject  to  any  disciplinary  and regulatory  control  on  the  ethical  and  independent issues.  Certain MAFs either as corporate and other juridical persons with the Institute brand name were

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given permission by the other regulators/Government for  doing  consultancy  business  in  India.   These entities  have  established  significant  commercial presence  in  India  and  are  rendering  assurance services.  These private limited companies in certain cases  solicit  professional  work  including  audits  by using  the  international  brand  name  and  projecting large  experience,  infrastructure  and  international database  including  turnover,  manpower  size, technical expertise and experience in other countries. These  private  limited  companies  work  under  the name  and  style/trade  name/brand  name  of  well known  MAFs  and  in  certain  cases  also  co-brand multinational  name with certain Indian CA including by making presentations and organizing mega public programmes.   In  fact  these  firms  and  individuals employ with them as Directors or partners or in other capacity  and  hold  out  to  the  public  that  they  are MAFs.  In view of their well known brand and presence internationally the corporate sector, the Government and  the  society  at  large  and  sometimes  even  the regulators  carry  a  wrong  impression  as  if  these private limited companies are in fact MAFs and the services  being  provided  by  these  private  limited companies  are  actually  services  being  provided  by such MAFs.

4.3 Certain  Indian  CA  firms  and  private  limited companies  associated with  them hold out  to  public that they are actually MAFs in India whereas to the ICAI/regulators,  they  hold  out  that  they  are  purely Indian  CA firms  having  no  relationship  with  foreign entities.

4.4 It  is  important  for  the  Government,  regulators and the ICAI to ensure that such wrong impression is not  permitted  and all  entities  other  than Chartered Accountants  in  practice  and  CA  firms  should  be actually  prohibited  directly  or  indirectly  from providing auditing and assurance services, as these are  required  to  be  regulated  in  the  public  interest. The very objective of having the profession relating to

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accountancy  under  specific  Act  of  Parliament, incorporating therein a strict disciplinary and ethical code was to ensure that  there is  no dilution of  the professional standards and services 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, citizenship and residency requirements, procedural impediments to  provide  services  in  such  countries.   While  the Institute has been pursuing vigorously for recognition of its qualification-for ensuring level playing field for Indian Chartered Accountants whereas the countries concerned  are  not  showing  a  sense  of  seriousness and  urgency  which  these  matters  deserve.   Indian Chartered  Accountants  are  not  getting  a  fair, reasonable and mutual treatment which they deserve. Since MAFs, in corporate or other form, are already commercially present and operating in India on the

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basis of holding out as MAFs/the Indian CA Firms and private limited companies may be de jure owned and managed to  Indian Chartered Accountants,  whereas de  facto these  are  fully  governed  MAFs  having headquarters  in  developed  countries,  who  are denying  a  level  playing  field  to  Indian  Chartered Accountants  in  their  country  by  the  restrictions  as explained herein.  As a result the negotiating capacity of  India  accounting  services  favouring  the  Indian accountants has been significantly reduced.  In fact, this  has  also  adversely  affected  the  bargaining capacity  of  the  Government  of  India  for  Indian accounting profession under the ongoing negotiations under  the  WTO/General  Agreement  of  Trade  in Services (GATS).  

xxxx

4.8 However,  it  has  been noticed that  the  entities having similar name as that of MAFs, which entered through  automatic/FIPB  route  for  rendering management consultancy services (as defined in CPC 865), are transgressing the permission so granted and are rendering taxation services (CPC 863), auditing, accounting and book keeping services (CPC 862) and legal  services  (CPC  861).  Instances  brought  to  the notice of the Study Team constituted by the Council in April,  1995 and the Study Group constituted by the Council in February, 2002 are placed at Annexure-III. Extracts taken from the website pages of some of the MAFs are given at Annexure-IV.

4.9 It  is  noted  that  as  per  the  policy  of  the Government of India, Foreign Direct Investment (FDI) is  not permitted in the field of accounting, auditing and  book  keeping  services,  taxation  services  and legal services and no commitment had been made by India  for  opening  of  such  services  under  the WTO/GATS.   However,  some entities  were  not  only providing  services  through  their  own  establishment (signifying their commercial presence i.e., Mode-3) in India  but  also  through  service  providers  in  India

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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  Institute,  and  such  firms which  had  masked  certain  portions  were  asked  to additionally  submit  copies  of  their  financial statements  i.e.  Income  &  Expenditure  Account  and Balance Sheets or Statement of Affairs including tax audit  reports  for  the last  3  years.   However,  these firms, instead of submitting unmasked and complete information, had been questioning the logic/reasoning behind asking such data, which according to the firms are  commercially  sensitive/confidential.   Despite reminders,  some  of  the  firms  had  not  submitted unmasked/complete details.

xxx

5A.8 Observations :

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(i) The  multinational  entity  has  granted permission to the participating firms in the network to use the brand name.  This is notwithstanding the fact whether the firms have signed the License Agreement with  the  entity  or  not.   The  relationship  between members  and  firms  how  these  are  governed  from same offices under common management and control is not disclosed.  The data disclosed on the website, however, clearly brings out the linkage.  

(ii) Though some of  the participating firms in the Network ‘A’ have not signed, the Verein document of  Name  License  Agreement  yet  while  making remittances to the multinational entity, the revenue of the entire network is taken into account.

(iii) The Verein document makes a mention of Supplemental  Regulation  but  while  submitting documents to the Institute the firms in Network ‘A’ have not submitted a copy thereof.

(iv) The networking firms in Network ‘A’  have received  financial  grants  from  a  non-CA  firm.   A member of the Institute is prohibited from receiving any  part  of  profits  from  a  non-member  of  the Institute.  Such an act on the part of a member/firm seems to be in violation of Item (3) of Part I of the First Schedule to the Chartered Accountants Act 1949.

(v) The networking firms in Network ‘A’  have made remittances to the multinational entity, sharing their  revenue  with  multinational  entity,  which  they have  claimed  to  be  towards  subscription  fees, technology cost including cost of licenses – obtained for  software,  budgeted  expenses,  cost  of administration  etc.   However,  the  firms  have  not provided break-up/computation and whether the cost includes  cost  towards  marketing,  publicity  and advertising 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

29

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 multinational entity in their email IDs and the same is displayed in their visiting cards. This  clearly  supports  holding  out  by  these  firms  in Network  A  that  they  are  part  of  the  international Network A of MAFs.  Some of these firms operate from the  same  premises  from  where  their  international affiliate  also  operates.   They  share  the  same telephone and fax nos. thus establishing that they are one and the same.  The Indian firms in Network A 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  the  affiliation with  any  international  entity.   In  this  regard,  the Council,  at its 172nd meeting held in January, 1995,

30

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  ….”,  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.

(viii) The  networking  firms  in  Network  A  are sharing their human resources with other firms in the network.  However, it has been possible to ascertain whether  the  articled  assistances  are  also  being rotated among the firms.  It may be mentioned that articled assistants are assigned to a member, whose obligation  is  to  train  them.   As  such,  the  articled assistances 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  of  articled  assistances  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.

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

31

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 ……..”,  “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 ought to be used is the name of an Indian firm or a foreign firm.

(ii) The  CA  firms  in  Network  B  have  made remittances  annually  to  the  multinational  entity sharing their revenue with multinational entity which they have claimed to be towards reimbursement of cost towards central  facilities and levies.  However, the  firms  have  not  provided  break-up/computation and  whether  the  cost  includes  cost  towards marketing/publicity and advertising 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  the  Code  of  Ethics.   The  firms  in Network  B  have  also  not  furnished  any  data  in support  of  their  claim that  the  money  remitted  by them  to  the  multinational  is  in  respect  of  above

32

matters only and that the same in no way relates to the vote 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.

(iii) The networking firms in Network A are sharing their  human  resources  with  other  firms  in  the network.   However,  it  has  not  been  possible  to ascertain  whether  the  articled  assistants  are  also being rotated among the firms.  It may be mentioned that  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,  1988 enabling  secondment  of  articled  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) 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

33

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  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.

(ii) The firms in Network C have admitted that the  global  network  identifies  broad  market opportunities,  develops  strategies,  strengthens network’s  internal  products  and  promotes international brand.  The member firms in India also gain  access  to  brand  and  marketing  materials developed by their overseas affiliate.  This amounts to indirectly  soliciting  professional  work  and  securing professional business by means which are not open to a Chartered Accountant.

(iii) The  firms  in  Network  C  have  mentioned that  they  have  joined  the  network  and  formed different  firms  in  different  cities  to  overcome  the limitation on number of partners.

(iv) The network C firms have entered into an agreement  for  sharing  of  resources.   Sharing  of human resources includes articled assistants also, as confirmed  by  one  of  their  then  partners,  in  a statement  given  by  him  to  the  members  of  the Committee.   It  may  be  mentioned  that  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

34

other member.  However, to address this issue, there exists  a  provision  under  Regulation  54  of  the Chartered  Accountants  Regulations,  1988  enabling secondment  of  articled  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.

(v) The  firms  in  the  Network  C  and  all  its personnel are using the MAFs name as part of domain name in  their  email  IDs,  which  is  displayed  in  the visiting cards of the partners of these firms as well as the CA employees.  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 operates.  They share the same telephone and fax nos.  thus establishing that they are  one and the same.   The Indian firms 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 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

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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 suffered, or incurred by the Business Trust arising out of any dispute against the Business Trust by a third party.

(vii) The  service  as  defined  in  the  agreement with  the  Trust  granting  license  for  use  of  name, prescribes the services which will be covered by the said Trust and rendered by the CA firm.  This includes audit, assurance as well as tax advisory services.

(viii) The  letterheads  and  the  visiting  cards furnished by the firm in Network C do not mention anywhere that it is a firm of Chartered Accountants.

5D.6  Observations : (i) The  firms  in  Network  D  have  a  management services  agreement,  technical  services  agreements, regulations and name license agreements with other entities, copies of which have not been furnished by the firms.

(ii) The firms in Network D and all  their  personnel have been using the name of multinational entity as domain name in their email IDs, which is displayed in the visiting cards used by the partners of these firms as well as their CA employees.  This clearly supports holding out by these firms that they are part of the international Network D of MAFs.  Some of these firms operate  from  the  same  premises  from  where  their international affiliate also operates.  They share the same telephone and fax nos. thus indicating that they are one and the same.  The Indian firms and MAFs are de  facto the  same  entities  providing  assurance, management and related services and as such their

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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 ……….”,  “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.

(iii) The firms in the Network D have signed an agreement for sharing of 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

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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 in Network D have not provided break up computation and whether the cost includes cost towards marketing, publicity and advertising 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 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  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.

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6. Findings

6.1 The Committee/Group with  a view to ascertain compliance with the various aspects of Code of Ethics had  received  documents/details  listed  in  para  4.13 hereinabove, from 171 firms.  Based on information received,  it  was found absence of  affiliation etc.  to 135. Of these, nearly firms submitted data in entirety. Other  firms  submitted  most  of  the  data,  such  as financial that for various reasons the number of firms actually 73% of the firms submitted the data masking of withholding most  of  the important  data,  such as financial  figures,  profit  sharing,  capital  contribution etc.   primarily  on  the  grounds  of  commercial sensitiveness/confidentiality of the data.

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6.2 In  the  absence  of  complete  set  of  documents such as complete copy of agreements between some of  the  Indian  CA  firms  and  their  international affiliates/network  along  with  annexures  referred thereto,  networking agreement,  internal  regulations, service agreements,  statute of  international  affiliate etc. it was not possible to draw conclusive inference as to violation of the Chartered Accountants Act, 1949 with  reference  to  sharing  of  fees  or  profits  with non-members,  sharing  profits  of  non-members, securing  business  through  means  not  open  to Chartered Accountants, solicitation, direct or indirect publicity etc.  This shall  require proper examination under the relevant provisions of Sections 21, 22 and Schedules framed thereunder.

6.3 Most of these networks are created/established outside India and are functioning under different set of  ethical  and  regulatory  guidelines.   The  India  CA firms having  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

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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 practice from the point of view of independence needs to be examined in the light of Code  of  Ethics  and  Schedules  to  the  Chartered Accountants  Act,  1949  and  Sections  21  and  22 thereof.

6.5 In respect of some firms with names approved by Institute  e.g.  “XYZ  &  Co.,  Patna”,  the  partnership deeds sent by the said firm revealed that the name of the firm is given as “XYZ & Co.” and not as “XYZ & Co. Patna” which is the name registered by the Institute. This  means  that  the  firm  has  submitted  to  the Institute the partnership deed of a firm by the name “XYZ & Co.”, whereas the partnership deed supposed to have been submitted should be that of “XYZ & Co., Patna”.  Letters were written to such firms requesting them  to  submit  the  appropriate  partnership  deed. The  first  have  replied  that  it  was  an  inadvertent mistake on their part and on the part of the Institute which had approved a trade/firm name with city name as the suffix.

6.6 The  firms,  M/s  WZ,  Patna  and  M/s  XYZ  &  Co. Patna,  vide  form  No.117  sought  approval  of  the Council of the Institute for the firm name, ‘XYZ, Patna’ and ‘XYZ & Co., Patna’ respectively.  The subsequent forms  18  filed  by  the  firm,  for  change  in  the constitution,  also  mention  the  firm  name  as  such. However, the partners of the firm, while affixing their signatures on the audit reports, mention the name of the firm as ‘XYZ’ and ‘XYZ & Co.’ respectively.  The audit  reports  of  companies,  which  were  audited  by them, have been signed on behalf of ‘M/s XYZ’ and not ‘M/s XYZ Patna’ and by ‘M/s. XYZ & Co.’ and not ‘M/s. XYZ & Co. Patna’.  It is an accepted fact that M/s XYZ, Patna and M/s XYZ & Co. Patna have carried out audits of certain companies whose shareholders have appointed M/s XYZ as the auditors.  M/s XYZ and M/s XYZ & Co., by allowing the partners of M/s XYZ, Patna

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and M/s  XYZ & Co.  Patna  respectively  to  audit  the accounts  of  clients  have  rendered  the  audited accounts invalid ab-initio.

6.7 It is noted that Item (1) of Part I of the Second Schedule  to  the  Chartered  Accountants  Act,  1949, which deals with professional misconduct in relation to Chartered Accountants in practice, mentions that a chartered accountant in practice shall be deemed to be guilty of professional misconduct,  if  he discloses information acquired in the course of his professional engagement to  any person other than his  client  so engaging  him,  without  the  consent  of  his  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  submitted  copies  of  agreements/contracts, partnership deeds, assessment orders or income-tax returns but around 27% of firms have not furnished the  information  and  have  masked/blackened/not

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provided the important information.  It may be further stated that some of  the firms instead of  complying with the directions of the Institute, have questioned the  logic/reasoning  behind  seeking  copies  of income-tax  returns,  which  according  to  them  are commercially  sensitive/confidential.   One  group  of firms belonging to one network has cited two legal opinions that they have obtained in this regard and have declined to submit unmasked details.  

However,  they  have  sought  personal  hearing.   As mentioned earlier, the Group considered this matter and  noted  that  documents  have  been  called  in pursuance of the directions given by the Council and that detailed reasoning for calling of documents has also been given to the firms.  Hence, the Group felt that  it  would  not  be  within  its  powers  to  override directions of the Council and grant any concession to certain firms.

6.9 Section 2(2)  of  the Chartered Accountants  Act, 1949 defines the term ‘to be in practice’.  Pursuant to Section 2(2) above, the Council  of the Institute has passed a resolution permitting Chartered Accountants in  practice  to  render  entire  range  of  management consultancy and other services.  The members of the Institute are governed by a Code of Ethics which is mandatory for  every  member of  the Institute.   The services  rendered  by  the  multinational  entities  in India  are  also  to  the  nature  of  management consultancy  (including  financial  services,  valuation, audit and assurance services etc.) and other related services which are carried on through the medium of private limited companies which are carried using the internationally known accounting firm’s name.  Since these entities employ Chartered Accountants as well as non-Chartered Accountants for discharging various responsibilities,  a  misleading  Impression  is  created that  the  services  rendered  by  the  private  limited companies  are  in  fact  rendered  by  a  Multinational Accounting  Firm.   In  fact,  this  is  not  so  as  the company rendering such services is neither registered

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with  ICAI  nor  is  governed  by  any  ethical  code  or regulatory framework.”

26. Accordingly,  the  recommendations  were  made to  the  effect

that the Council should consider action against the firms which had

not 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;

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Council  should consider action against  the firms using name and

logo of international networks; action should also be considered for

securing professional business by means which are not open to CAs

in India.  The Council should also issue public statement that without

specific  approval  of  the  Council,  by  a  notification  under  Section

29(2) of the CA Act, no MAF can directly or indirectly operate in India

through any agreement or arrangement with any Indian entity/firm

of CAs.   No international firm or entity should be permitted to hold

out to public that they are operating in India as a MAF as part of

their network. No Indian CA firm should be permitted to pay any part

of their profit or fee or other receipts to any person other than a

member  of  ICAI  or  a  firm  owned  by  them  by  way  of  cost  or

percentage  except  payment  for  specific  professional  fee.   The

Council may request the Ministry of Corporate Affairs, Reserve Bank

of  India  and  other  relevant  Ministries/Departments  to  take

appropriate  action  so  that  the  recommendations  can  be

implemented to engage the services of accounting firms registered

with  ICAI.  Only  CAs and CA firms registered with  ICAI  should  be

permitted to provide audit and assurance services.  Wherever MAFs

are operating in India, directly or indirectly, they should not engage

in  any  audit  and  assurance  services  without  ‘No  Objection’  and

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permission from ICAI and RBI.  Instructions may be issued that any

joint  venture  agreement,  MOU,  foreign  collaboration  agreement,

stakeholders  agreement,  private  equity  fund  condition,  venture

capital fund condition or side letters prescribing for appointment of

a specific Chartered Accountant or a CA Firm or any other entity are

illegal and against public interest.   

 Stand of the ICAI

27. ICAI in its response submitted that the function of the institute

was to regulate the profession of chartered accountancy and to

take  action  against  misconduct  of  its  members  under  The

Chartered Accountants (Procedure of Investigations of Professional

and Other Misconduct and Conduct of Cases) Rules,  2007.  The

accounting professionals had significant role in the economy of the

country.   The economy of India had witnessed two major securities

scams  in  1992  and  2001.  The  CA  Act  was  amended  on  the

recommendation  of  the  Joint  Parliamentary  Committee  which

enquired  into  the  stock  market  scams  including  the  high  level

committee  on  the  ‘Corporate  Audit  and  Governance’  under  the

chairmanship  of  Shri  Naresh  Chandra  which  examined  the

Auditor-Company relationship and disciplinary mechanism for the

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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 Rs.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 same was included in the “Sundry Income”

in their annual accounts.  The stand of LL, Kolkata, was that it was

a member of PwC Network of Firms around the world.  It received

grant  of  Rs.28.97  crores  for  maintaining  quality  standards  from

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PwC Services BV during the financial year ended 31st March, 2011

as an outright, non-refundable grant. The Disciplinary Directorate

sent a reminder to the RBI and sent a letter to the Commissioner of

Income  Tax,  Kolkata  and  Joint  Secretary  (Revenue),  Ministry  of

Finance. The Deputy Commissioner of Income Tax, Kolkata stated

that scrutiny proceedings on issue of transfer pricing were pending

for the assessment year 2010-2011 and 2011-2012 in respect of

PwCPL.  With regard to the failure of PwC, Bangalore to discover

the scandal of ‘Satyam’, it was stated that the US Regulators, i.e.,

Securities and Exchange Commission (SEC) and PCAOB had taken

action but in India the proceedings were getting prolonged.  As

regards failure of LL to point out high level of NPAs of GTB, it was

submitted that no formal complaint was filed against PwCPL.  The

same is not registered and the Institute could not take any action

against  them under  the CA Act  as  amended in  2006 and 2007

Rules.  Action  was  taken  against  the  members  of  LL,  Shri  S.

Gopalakrishnan,  Shri  P.  Rama Krishna and Shri  Manish  Agarwal.

Action was also taken against Shri Kersi H. Vachha and Shri Amal

Ganguli.  In 2002-2003 action was taken against Shri Partha Ghosh

and Shri D.V.P. Rao of M/s. PwC.  PwC Bangalore were the auditors

of  ‘Satyam’  for  which  action  was  taken  against  CA  S.

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Gopalakrishnan  (For  the  period  1.4.2000  to  31.3.2007),  CA  S.

Talluri (For the period 1.4.2007 to 30.9.2008), CA Pulavarthi Siva

Prasad  (for  the  period  1.4.2001  to  31.3.2005),  CA  Chintapatla

Ravindernath (for the period 1.4.2005 to 30.9.2008). Action was

also taken against V. Srinivasu, the then CFO of the Satyam, V.S.

Prabhakara Gupta, the then head of Internal Audit Cell of Satyam.

The Joint Director, SFIO filed a complaint dated 3rd March, 2009 in

respect of DSQ Softwares Limited against CA Naresh Kumar Tharad

of M/s. N.K. Tharad & Co., Chartered Accountants, Kolkata. It was

revealed that company had made preferential allotment of shares

to various entities in a fraudulent manner.

Stand of the Respondent-Firms

29. In  its  written  submissions,  Respondent  No.5  M/s.  Deloitte

Haskins & Sells 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

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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  auditing  standards  and practices followed in India should be aligned to international standards and practices with customization to the extent necessary.

b) The small size of majority of India audit firms being  a  constraint  in  facing  global competition,  consolidation  through  merger and networking of India audit firms should be encouraged through policy measures.

c) With  audit  becoming  a  multi  disciplinary function, formation of multi disciplinary audit firms with participation by professionals from other  relevant  professions  should  be promoted.

d) It  should  be  ensured  that  the recommendations  of  Quality  Review  Board

49

conducting technical evaluations of India audit firms are implemented.

e) If and when audit and assurance are opened to  global  competition,  the  principle  of reciprocity  should  be  followed  and  the interests of India audit firms should be given due consideration.”

31. The stand of the PwC Network (Respondents 6 to 11) is that

PwC or PW is the brand owned by PwCIL registered under the laws of

England  limited  by  guarantee.   PwCIL  acts  as  a  coordinating

company within the PwC network and does not provide any business

or audit services. Respondent Nos.6 to 11 are member entities of

the PwC Network which consists of companies and firms around the

world all of which are separate legal entities.   PwCIL allows desirous

entities  to  become  members  of  the  PwC  network  if  they  follow

global standards to provide quality services for clients in respect of

audit/non  audit  services.   Uniform  and  consistent  delivery  is

important.  PwC network is not a global partnership. The network

activities are to develop and implement policies and initiatives for a

common  and  coordinated  approach  to  maintain  quality  and

standards of service.  PwC brand name is based on name licence

agreement to exercise cooperation amongst member firms.  All the

members  (in  177  countries)  have  to  pay  a  licence  fees.   PwC

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Services  BV  (Services  BV)  is  incorporated  in  Netherlands  to

operationalize global standards of services. Services BV coordinates

efforts of various firms across the globe to develop superior global

common standard.  Services BV does not do any client related work

but develop standards.   It  pools  money by charging the network

entities a percentage of their revenue which is used to meet the

expenses  to  develop  standards.   Firm  Service  Agreements  are

signed by network 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

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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

Board  allowed  compounding  of  the  offences  on  payment  of

composition amount of Rs.8,31,000/-.   

34. Auditing services are being carried by firms belonging to PwC

Group as follows :

i) Price  Waterhouse  [FRN-310002E]  –  66  Indian Partners (Respondent No.7)

ii) Lovelock  &  Lewes  [FRN-301056E]  –  66  Indian Partners (Respondent No.8)

iii) Price  Waterhouse  &  Co.  [FRN-050032S]  –  19 Indian Partners (Respondent No.9)

iv) Price Waterhouse, Bangalore [FRN-007568S] – 18 Indian Partners (Respondent No.10)

v) Dalal & Shah LLP [FRN-102021W/W100110] – 16 Indian Partners (Respondent NO.11)

35. There are other LLPs which are members of PwC Network in

India.  All the partners are Indian by nationality and registered with

52

ICAI.   Directors  are  not  partners.  Indian  Chartered  Accountant

member firms of PwC Network operate as independent entities.

36. Guidelines of the ICAI dated 27th September, 2011 apply to a

network  if  the  network  has  common  ownership,  control  or

management,  common  quality  control  policies  and  procedures,

common  business  strategy,  use  of  a  common  brand  name  or  a

significant part of professional resources.    

37. The  Expert  Group  Report  of  the  ICAI  recommended  the

following:

“No person or entity and specially Chartered Accountants can hold out to public that they are operating in  India  as or  on behalf  or  in their trade name and in any other manner so as  to  represent  them  being  part  of  or authorized by MAFs to operate on their behalf in  India  or  they  are  actually  representing MAFs or they are MAFs office/representatives in India, except those registered with ICAI in terms  of  Clause  (Hi)  as  a  network,  in accordance  with  network  guidelines  as notified by the ICAI from time to time.”  

[(Clause 7.12 (v) of the Report at pg.152 of SLP No.1808 of 2016].”

38. The guidelines  allow registration  of  a  network and the PwC

firms  have  filed  their  declaration  in  accordance  with  the  above

53

guidelines and are registered in India as per Regulations of the ICAI.

Merely because the PwC audit firms are part of global PwC Network

does not by itself violate any applicable law. As regards the grants

received  in  Financial  Years  2008-09,  2009-10  and  2010-11,

amounting to Rs.142.9, tax has been paid as per assessment and

proceedings  are  pending.   The  Network  has  furnished  all  the

information to the ICAI.

39. Since all the partners are Indians and are 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 Rs.477.64 crores from PwC Services

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BV during the period 2009 to 2013.  The grants are of two types –

professional capacity building and business expansion.  Rs.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 of the Registrar of Companies (ROC)

41. The stand of the ROC, Kolkata is that prosecution was initiated

against  the  auditors  of  the  Company,  who  compounded  the

offences.  Certain proceedings are still pending against the auditors

of the Company.

Stand of the RBI

42. The stand of the RBI is that it only issues circulars and frames

Regulations under the FEMA but does not conduct any investigation

for  compliance  thereof.  Regulation  3  of  the  Foreign  Exchange

Management  (Investment  in  Firm or Proprietary  concern  in  India)

Regulations,  2000 is  that  a  person resident  outside  India  cannot

invest in a firm or proprietary concern without permission of the RBI.

55

As  per  para  3.3.2  of  the  FDI  Policy,  investment  without  prior

approval of the RBI is not permitted.

The statutory provisions

43. Sections 2(2), 25 and 29 of the CA Act are reproduced

below :

“2 (2) A member of the Institute shall be deemed “to be in practice”,  when  individually  or  in  partnership  with chartered accountants [in practice], he, in consideration of remuneration  received  or  to  be  received—  (i)  engages himself  in  the  practice  of  accountancy;  or  (ii)  offers  to perform  or  performs  services  involving  the  auditing  or verification  of  financial  transactions,  books,  accounts  or records, or the preparation, verification or certification of financial  accounting  and  related  statements  or  holds himself out to the public as an accountant; or (iii) renders professional services or assistance in or about matters of principle or detail relating to accounting procedure or the recording, presentation or certification of financial facts or data; or] (iv) renders such other services as, in the opinion of  the  Council,  are  or  may  be  rendered  by  a  chartered accountant [in practice]; and the words “to be in practice” with their grammatical variations and cognate expressions shall  be  construed  accordingly.  3  Explanation:—  An associate  or  a  fellow  of  the  Institute  who  is  a  salaried employee of a chartered accountant [in practice] or [a firm, of such chartered accountants] shall, notwithstanding such employment, be deemed to be in practice for the limited purpose of the [training of articled [assistants]].

25.  Companies  not  to  engage  in  accountancy.  (1)  No company, whether incorporated in India or elsewhere, shall practise  as  chartered  accountants.  (2)  If  any  company contravenes the provisions 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

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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  notification,  make  rules  to carry out the provisions of this Act.  (2) In particular and without prejudice to the generality of the foregoing powers, such  rules  may  provide  for  all  or  any  of  the  following matters,  namely:-  (a)  the  manner  of  election  and nomination  in  respect  of  members  to  the  Council  under sub-section (2) of section 9; (b) the terms and conditions of service  of  the  Presiding  Officer  and  Members  of  the tribunal, place of meetings and allowances to be paid to them  under  sub-section  (3)  of  section  10B;  (c)  the procedure of investigation under sub-section (4) of section 21; (d) the procedure while considering the cases by the Disciplinary  Committee  under  sub-section  (2),  and  the fixation  of  allowances  of  the  nominated  members  under sub-section  (4)  of  section  21B;  (e)  the  allowances  and terms  and  conditions  of  service  of  the  Chairperson  and members  of  the  Authority  and  the  manner  of  meeting expenditure  by  the  Council  under  section  22C;  (f)  the procedure  to  be  followed  by  the  Board  in  its  meetings under  section  28C;  and  (g)  the  terms and conditions  of service  of  the  Chairperson  and  members  of  the  Board under sub-section (1) of section 28D.]”

First and Second Schedule of the CA Act :

[THE FIRST SCHEDULE] [See Sections 21(3), 21A(3) and 22]

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PART I Professional misconduct in relation to chartered

accountants in practice A chartered accountant in practice shall be deemed to be guilty of professional misconduct, if he — (1)  allows any person to  practice  in  his  name as  a chartered  accountant  unless  such  person  is  also  a chartered accountant in practice and is in partnership with or employed by him;  (2) pays or allows or agrees to pay or allow, directly or indirectly, any share, commission or brokerage in the fees  or  profits  of  his  professional  business,  to  any person  other  than  a  member  of  the  Institute  or  a partner or a retired partner or the legal representative of  a  deceased  partner,  or  a  member  of  any  other professional body or with such other persons having such  qualifications  as  may  be  prescribed,  for  the purpose of rendering such professional services from time  to  time  in  or  outside  India.   

Explanation. - In this item, “partner” includes a person residing  outside  India  with  whom  a  chartered accountant  in  practice  has  entered  into  partnership which is not in contravention of item (4) of this Part;  (3) accepts or 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;

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(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  that  nothing  herein  contained  shall  be construed as prohibiting any arrangement permitted in terms of items (2), (3) and (4) of this Part;  (6) solicits clients or professional work either directly or indirectly  by  circular,  advertisement,  personal communication or interview or by any other means:  Provided  that  nothing  herein  contained  shall  be construed as preventing or prohibiting –  (i)  any  chartered  accountant  from  applying  or requesting for or inviting or securing professional work from another chartered accountant in practice ; or  (ii) a member from responding to tenders or enquiries issued  by  various  users  of  professional  services  or organisations  from  time  to  time  and  securing professional work as a consequence;  (7) advertises his professional attainments or services, or  uses  any  designation  or  expressions  other  than chartered  accountant  on  professional  documents, visiting cards, letter heads or sign boards, unless it be a degree of a University established by law in India or recognised  by  the  Central  Government  or  a  title indicating  membership  of  the  Institute  of  Chartered Accountants of India or of any other institution that has

59

been recognised by the Central Government or may be recognised by the Council:  Provided  that  a  member  in  practice  may  advertise through a write up setting out the services provided by him or his  firm and particulars of his  firm subject to such guidelines as may be issued by the Council;  (8)  accepts a position as auditor previously held by another chartered accountant or a certified auditor who has  been  issued  certificate  under  the  Restricted Certificate  Rules,  1932  without  first  communicating with him in writing;  (9) accepts an appointment as auditor of a company without  first  ascertaining  from  it  whether  the requirements  of  section  225  of  the  Companies  Act, 1956 9 1 of 1956] in respect of such appointment have been duly complied with;  (10) charges or offers to charge, accepts or offers to accept in respect of any professional employment, fees which are based on a percentage of profits or which are contingent  upon  the  findings,  or  results  of  such employment, except as permitted under any regulation made under this Act;  (11) engages in any business or occupation other than the  profession  of  chartered  accountant  unless permitted by the Council so to engage:  Provided that nothing contained herein shall 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

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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 member of the Institute, whether in practice or not, shall  be  deemed  to  be  guilty  of  professional misconduct, if he –  (1) not being a fellow of the Institute, acts as a fellow of the Institute;  (2) does not supply the information called for, or does not  comply  with  the  requirements  asked  for,  by  the Institute,  Council  or  any  of  its  Committees,  Director (Discipline),  Board  of  Discipline,  Disciplinary Committee,  Quality  Review  Board  or  the  Appellate Authority;  (3)  while  inviting  professional  work  from  another chartered accountant or while responding to tenders or enquiries or while  advertising through a write up,  or anything as provided for in items (6) and (7) of Part I of this Schedule, gives information knowing it to be false.

PART IV

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Other misconduct in relation to members of the Institute generally  A member of the Institute, whether in practice or not, shall be deemed to be guilty of other misconduct, if he —  (1) is held guilty by any civil or criminal court for an offence which is  punishable  with  imprisonment  for  a term not exceeding six months;  (2) in the opinion of the Council, brings disrepute to the profession  or  the  Institute  as  a  result  of  his  action whether or not related to his professional work.]

THE SECOND SCHEDULE [See sections 21(3), 21B(3) and 22 ]  

PART I Professional misconduct in relation to chartered accountants in practice  A chartered accountant in practice shall be deemed to be guilty of professional misconduct, if he –  (1) discloses information acquired in the course of his professional engagement to any person other than his client  so  engaging  him,  without  the  consent  of  his client or otherwise than as required by any law for the time being in force;  (2) certifies or submits in his name, or in the name of his  firm,  a  report  of  an  examination  of  financial statements unless the examination of such statements and the related records has been made by him or by a partner  or  an  employee  in  his  firm  or  by  another chartered accountant in practice;  (3) permits his name or the name of his firm to be used in connection with an estimate of earnings contingent upon future transactions in a manner which may lead

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to the belief that he vouches for the accuracy of the forecast;  (4) expresses his opinion on financial statements of any business  or  enterprise  in  which  he,  his  firm,  or  a partner in his firm 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 Institute, whether in practice or not, shall  be  deemed  to  be  guilty  of  professional misconduct, if he—

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(1) contravenes any of the provisions of this Act or the regulations made thereunder or any guidelines issued by the Council;  (2) being an employee of any company, firm or person, discloses  confidential  information  acquired  in  the course of his employment except as and when required by any law for  the time being in force or  except as permitted by the employer;  (3)  includes  in  any information,  statement,  return  or form to be submitted to the Institute, Council or any of its  Committees,  Director  (Discipline),  Board  of Discipline,  Disciplinary  Committee,  Quality  Review Board  or  the  Appellate  Authority  any  particulars knowing them to be false;  (4)  defalcates  or  embezzles  moneys  received  in  his professional capacity.

PART III Other misconduct in relation to members of the Institute generally  A member of the Institute, whether in practice or not, shall be deemed to be guilty of other misconduct, if he is  held  guilty  by  any  civil  or  criminal  court  for  an offence which is  punishable  with  imprisonment  for  a term exceeding six months. Regulation  3  of  the  Foreign  Exchange Management (Investment in Firm or Proprietory concern in India) Regulations, 2000 “3. Restrictions on investment in a firm or a proprietary concern in India by a person resident outside India  Save  as  otherwise  provided  in  the  Act  or  rules  or regulations  made  or  directions  or  orders  issued thereunder,  no  person  resident  outside  India  shall make  any  investment  by  way  of  contribution  to  the capital  of  a  firm  or  a  proprietary  concern  or  any association of persons in india;

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Provided that the Reserve Bank may, on an application made  to  it,  permit  a  person  resident  outside  India subject  to  such  terms  and  conditions  as  may  be considered necessary to make an investment by way of contribution to  the capital  of  a  firm or a  proprietary concern or any association of persons in India.”

Clause  3.3.2  (III)  of  the  Circular  2  of  2010  of  the Consolidated FDI (CFDI) Policy :

“3.3.2 FDI in Partnership Firm / Proprietary Concern:  

(iii)Investment  by  non-residents  other  than  NRIs/PIO:  A person resident outside India other than NRIs/PIO may make an application and seek prior approval of Reserve Bank for making investment by way of contribution to the capital of a  firm  or  a  proprietorship  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

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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  enacted  in  US  making  a  foreign  public

accounting  firm  preparing  audit  reports  to  be

accountable to the Public Company Accounting.  Similar

oversight body may need to be considered in India.

iv) Section  29  of  the  CA  Act  provides  that  if  a  specified

country,  prohibits  persons  of  Indian  domicile  from

becoming members of any institution similar to ICAI or

practicing  the  profession  of  accountancy  or  subjects

them to unfair discrimination in that country, no subject

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of  any  such  country  shall  be  entitled  to  become  a

member  of  the  Institute  or  practice  the  profession  of

accountancy in India.  

v) FDI Policy and the RBI Guidelines framed under the FEMA

prohibit  the  investment  by  a  person  outside  India  to

make investment by way of contribution to the capital of

a firm or a proprietary concern without permission of the

RBI

vi) PwC Services BV Netherlands has made investments in

Indian firms. According to the petitioners, the investment

is  also  intended  to  acquire  an  audit  firm  through  a

circuitous route of giving interest free loans and further

investments are in the form of grants for enhancement of

skills.  Profit sharing is in the form of licence fees/network

charges.  According to the network, the partners are all

Indian partners and use of common brand name is only

for  uniform  standard  and  giving  of  grants  is  for

maintaining the said standard.  There was no investment

by  an  entity  outside  India.   Nor  it  amounts  to  profit

sharing by the Indian accountancy firms with an entity

outside India.

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45. It is an undisputed fact that there are remittances from outside

India.  The same could be termed as investment even though the

remittances are claimed to be interest free loans to partners.  The

amount  could  also  be  for  taking  over  an  Indian  chartered

accountancy firm.  Relationship of partnership firms, though having

Indian partners, operating under a common brand name from same

infrastructure, with foreign entity is not ruled out.  It is not possible

to rule out violation of FDI policies, FEMA Regulations and the CA

Act.   Thus,  appropriate  action  may have to  be taken in  pending

proceedings or initiated at appropriate forum.

46. The  investigation  so  far  carried  out  cannot  be  held  to  be

complete  in  all  respects.   The  investigation  by  income  tax

authorities is only for assessment of income tax.  Action by the ROC

also does not cover the issue raised herein.  The investigation 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

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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, the report of the committee of experts of ICAI dated

29th July, 2011 does not specifically name the MAFs involved, groups

A,B,C,D  are  mentioned.   The  ICAI  ought  to  constitute  an  expert

panel  to  update  its  enquiry.   Being  an  expert  body,  it  should

examine the matter further to uphold the law and give a report to

concerned authorities for appropriate action. Though the Committee

analysed  available  facts  and  found  that  MAFs  were  involved  in

violating  ethics  and  law,  it  took  hyper  technical  view  that  non

availability of complete information and the groups as such were not

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amenable to its disciplinary jurisdiction in absence of registration.  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.

48. Thus, a case is made out for examination not only by ED and

further examination by the ICAI but also by the Central Government

having regard to the issues of violation of RBI/FDI policies and the CA

Act by secret arrangements.   

49. It can hardly be disputed that profession of auditing is of great

importance  for  the  economy.   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.  It has been pointed out that post Enron Anderson

Scandal, in the year 2000, Sarbanse Oxley Act was enacted in U.S.

requiring 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

benefitting at the cost of public interest.  The audit companies were

also  prohibited  from  providing  non  audit  services  to  companies

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whose audits were conducted by such auditors.  Needless to say that

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.  It appears necessary to

realise that auditing business is required to be separated from the

consultancy  business  to  ensure  independence  of  auditors.   The

accounting firms could not be left to self regulate themselves.

50. While we appreciate that it is 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

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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.   In expanding horizons of modern jurisprudence, it is

certainly permissible.  Its frontiers are unlimited.  The horizon of the

doctrine is expanding.  While the company is a separate entity, the

Court has come to recognize several exceptions to this rule.  One

exception is where corporate personality is used as a cloak for fraud

or  improper  conduct or  for  violation  of  law.   Protection  of  public

interest being of paramount importance, if the corporate personality

is to be used to evade obligations imposed by law, the real state of

affairs  needs  to  be  seen1.    The  same  principle  applies  while

overseeing  the  compliance  of  applicable  ethics  of  not  permitting

profit  sharing or  complying with  the ceiling limit  for  the business

1  State of Rajasthan vs. Gotan Lime Stone Khanji Udyog Pvt. Ltd. (2016) 4 SCC 469, paras 24 to 28;  State of Karnataka vs. Selvi J. Jayalalitha (2017) 6 SCC 263, paras 205 to 211

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which  is  violated  by  using  the  technique  of  sub  contracts  for

outsourcing.  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.  It is

perhaps for this reason that the network firms avoided giving the

information  sought  by  the  Committee.   The  issue  of  separate

oversight  body  for  auditing  work  and  updating  existing  legal

framework appear to be necessary.

51. The other aspect is of investment in CA firms, in violation of

prohibition of FDI policy, by using a circuitous route of interest free

loans to  partners.   The fact  that  the income tax authorities  have

taken the grants received as revenue receipts and taxed the same as

such is not conclusive to hold that the receipt is not an investment

which is impermissible.  If investment is not permitted, 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.

52. Absence of revisiting and restructuring oversight mechanism

as  discussed  above  may  have  adverse  effect  on  the  existing

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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,  2010’ to  ensure  more

transparency and accountability of financial institutions to decrease

the risk of investing needs consideration.  It  sets up an oversight

body called the Financial Stability Oversight Council (FSOC).

53. Accordingly, we issue the following directions:

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(i) 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 Act and the statutory

Code of Conduct for the CAs requires revisit so as to

appropriately  discipline  and  regulate  MAFs.  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.   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 above, apart from

any other material.  It may also consider steps for

effective enforcement of the provisions of the FDI

policy and the FEMA Regulations referred to above.

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It  may identify the remedial measures which may

then be considered by appropriate authorities. 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

UOI may take further action after due consideration

of such report.   

(ii) The  ED  may  complete  the  pending  investigation

within three months;

(iiI) ICAI may further examine all the related issues at

appropriate  level  as  far  as  possible  within  three

months  and  take  such  further  steps  as  may  be

considered necessary.

The matters stand disposed of accordingly.

     …………………………….J. [ADARSH KUMAR GOEL]

…………………………..J.        [UDAY UMESH LALIT]

NEW DELHI; 23rd FEBRUARY, 2018.