SC, in a detailed 75 pages
judgment, lifts corporate veil of Multinational Accounting Firms (MAFs), holds
that MAFs violate CA Act, orders further investigation by Enforcement
Directorate & examination by ICAI, to probe violation of RBI/FDI policies
and the CA Act; SC further calls for establishment of a separate oversight body for auditors, on the lines of PCAOB in USA ; Division bench of Justice Adarsh Kumar Goel and Justice Uday Lalit makes scathing observations on the conduct of MAFs in India, notes that "Code of Conduct for the CAs prohibits fee sharing, advertisements but the MAFs by using international brands and mixing other services with the services to be provided as part of practice of chartered accountancy violate the said Code of Conduct for which there is no regulatory regime as the MAFs do not register themselves with ICAI."; Calling for MAFs to comply with Indian regulatory laws in "substance", SC rules that "The law enforcing agencies are expected to see the real situation. As found by the Expert Committee in its report, there is a compliance by MAFs only in form and not in substance, by having got registered partnership firms with the Indian partners, the real beneficiaries of transacting the business of chartered accountancy remain the companies of the foreign entities."; Further concluding that the partnership firms in India with MAFs affiliations are merely a face to defy the law, Apex Court asserts that "The principle of lifting the corporate veil has to apply when the law is sought to be circumvented."; Court frowns on MAFs violating ethics, which does not permit profit sharing or complying with ceiling limit for the business, which the MAFs circumvent vide sub-contracts/outsourcing; SC observes "If the premises are same, phone number/fax number is same, brand name is same, the controlling entity is same, human resources are same, it will be difficult to expect that there is full compliance on mere separate registration of a firm... The prohibition under Section 25 of the CA Act can be held to be defeated…"; On investments by MAFs in Indian affiliate entities through interest free loans to partners, SC terms it as "circuitous route", further notes that "the policy of law cannot be defeated by terming such investment as grant for quality control specially when the grant has been used to acquire a chartered accountancy firm."; SC criticizes ICAI for adopting an "hyper-technical" approach in its investigation of MAFs and submitting to the Court that though MAFs were involved in violating ethics and law, the MAFs were not amenable to ICAI's disciplinary jurisdiction; On ICAI's role, SC observes "A premier professionals body cannot limit its oversight functions on technicalities and is expected to play proactive role for upholding ethics and values of the profession by going into all connected and incidental issues."; SC further calls for establishment of a separate oversight body for auditors, on the lines of PCAOB in USA, expresses concern in following words "Financial statements audited by qualified auditors are acted upon and failures of the auditors have resulted into scandals in the past. The auditing profession requires proper oversight. Such oversight mechanism needs to be revisited from time to time...”; SC also calls for necessity to separate auditing business from consultancy business to ensure independence of auditors; Finally, SC issues 3 directions, namely i) for Union Govt. to constitute a 3 member Committee of Experts to look into the issue of revisiting the CA Act to appropriately discipline & regulate MAFs and to consider on the lines of the US law - Dodd Frank, the need for an appropriate mechanism for oversight of auditors. ii) The ED shall complete the pending investigations within 3 months. iii) ICAI to examine related issues within 3 months:SC
and the CA Act; SC further calls for establishment of a separate oversight body for auditors, on the lines of PCAOB in USA ; Division bench of Justice Adarsh Kumar Goel and Justice Uday Lalit makes scathing observations on the conduct of MAFs in India, notes that "Code of Conduct for the CAs prohibits fee sharing, advertisements but the MAFs by using international brands and mixing other services with the services to be provided as part of practice of chartered accountancy violate the said Code of Conduct for which there is no regulatory regime as the MAFs do not register themselves with ICAI."; Calling for MAFs to comply with Indian regulatory laws in "substance", SC rules that "The law enforcing agencies are expected to see the real situation. As found by the Expert Committee in its report, there is a compliance by MAFs only in form and not in substance, by having got registered partnership firms with the Indian partners, the real beneficiaries of transacting the business of chartered accountancy remain the companies of the foreign entities."; Further concluding that the partnership firms in India with MAFs affiliations are merely a face to defy the law, Apex Court asserts that "The principle of lifting the corporate veil has to apply when the law is sought to be circumvented."; Court frowns on MAFs violating ethics, which does not permit profit sharing or complying with ceiling limit for the business, which the MAFs circumvent vide sub-contracts/outsourcing; SC observes "If the premises are same, phone number/fax number is same, brand name is same, the controlling entity is same, human resources are same, it will be difficult to expect that there is full compliance on mere separate registration of a firm... The prohibition under Section 25 of the CA Act can be held to be defeated…"; On investments by MAFs in Indian affiliate entities through interest free loans to partners, SC terms it as "circuitous route", further notes that "the policy of law cannot be defeated by terming such investment as grant for quality control specially when the grant has been used to acquire a chartered accountancy firm."; SC criticizes ICAI for adopting an "hyper-technical" approach in its investigation of MAFs and submitting to the Court that though MAFs were involved in violating ethics and law, the MAFs were not amenable to ICAI's disciplinary jurisdiction; On ICAI's role, SC observes "A premier professionals body cannot limit its oversight functions on technicalities and is expected to play proactive role for upholding ethics and values of the profession by going into all connected and incidental issues."; SC further calls for establishment of a separate oversight body for auditors, on the lines of PCAOB in USA, expresses concern in following words "Financial statements audited by qualified auditors are acted upon and failures of the auditors have resulted into scandals in the past. The auditing profession requires proper oversight. Such oversight mechanism needs to be revisited from time to time...”; SC also calls for necessity to separate auditing business from consultancy business to ensure independence of auditors; Finally, SC issues 3 directions, namely i) for Union Govt. to constitute a 3 member Committee of Experts to look into the issue of revisiting the CA Act to appropriately discipline & regulate MAFs and to consider on the lines of the US law - Dodd Frank, the need for an appropriate mechanism for oversight of auditors. ii) The ED shall complete the pending investigations within 3 months. iii) ICAI to examine related issues within 3 months:SC
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