This article is written by Seep Gupta, from the Institute of Law, Jiwaji University. This is an exhaustive article which deals with the case analysis of the case, S.Sukumar vs. Institute of Chartered Accountants of India.

Introduction

The special leave petition was filed under the Supreme Court against the order passed by the Karnataka High Court to grant permission to exercise the power granted under Section 21 of the Chartered Accountants Act 1949, (hereinafter C.A. Act). This Section gives the power to initiate investigations against the Multinational Accounting Firms (MAFs) and Indian Chartered Accountancy Firms (ICAFs) for breaching the code of professional ethics under the C.A. Act. And, also to take penalized action by way of cancellation of their licenses granted to them by the Institute of Chartered Accountant of India.

Background of the case

It is a special leave petition arising from the appeal of the Karnataka High Court. The writ petition was filed under Article 226 of the Indian Constitution to initiate the proceedings against the Multi Accountant firms (MAFs) for the breach of the code of the conduct that is given under the C.A. Act. According to the arguments raised, it was said that the MAFs were illegally operating their accounting, auditing, bookkeeping, and taxation services, they are operating illegal operations with the help of the Institute of Chartered Accountancy of India which are violative of Section 224 of the Company’s Act 1956. And Section 25 and 29 of the C.A. Act 1949 and the code of conduct laid down by the Indian Chartered Accountancy of India. In 1994, a study group was constituted for investigating the illegal activities carried out by the Multi Accountancy firms (MAFs) in India without the formal registration with the Institute of Chartered Accountancy of India. This was done after the advancement of liberalization policies in India and after the signing of the General Agreement on Tariffs and Trade. It was later revealed that the members of the ICAI were associating with the bodies such as directors and managers to provide an escape route to these Multi Accountancy Firms (MAFs). 

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The Big 4 companies such as Pricewaterhouse Cooper, Deloitte, Ernst & Young, KPMG International. These were added as respondents. The Karnataka High Court disposed of the petition by quoting the ICAI status report which stated that the institute has already taken necessary precautions regarding it. It was humbly said by the learned counsel of the respondents that these big 4 are not the chartered accountancy firms, they are mere consultancy firms. 

An Appeal was admitted in the Supreme Court as the Special Leave Petition (Civil) Number. 1808 of 2016 against the order of the Karnataka High Court dated 3rd August 2015. It was filed by the centre as Public Interest Litigation (PIL). 

Issues related to the case

The issue was raised in the form of the appeal against the writ petition of the Karnataka High Court and the writ petition which was directly filed under the Supreme Court was: 

  • Whether MultiNational Accounting Firms (MAFs) are operating illegally in a hidden manner in violation of the law in force? If so, then why no effective steps have been taken till yet?
  • What are the orders required to be passed to curb the illegal practices and working of Multinational Accounting firms?

Accusations levelled in the petition

The petition mentioned about the accusations about one of the leading Multinational auditor i.e. Price Waterhouse Cooper and other firms which are connected through a network to Price Waterhouse Cooper. These global MNCs have been previously fined $ 2 billion. It was earlier banned from auditing listed companies because it failed to detect many major frauds especially Satyam Fraud (2009) in which the chairman Ramalinga Raju of the India-based company Satyam Computer services confessed and opened up about the corporate scandal that the company’s accounts were falsified.

The current petition as a special leave petition in the Supreme Court has accused PwC i.e. Price Waterhouse Cooper and ICAI on some alleged illegal malpractices by the way of:

  1. Violation of the Norms of the Foreign Direct Investment by infusing foreign money.
  2. Irregularly merging and acquiring other auditing firms by violating the norms.
  3. Engaging in illegal accounting, bookkeeping, and accounting insurance policies.

Arguments 

Petitioner

According to the petition submitted by the appellant, Multi Accounting Firms (MAFs) violated the Section 25 and Section 29 of the Chartered Accountancy Act 1949, the policies and code of conduct which are mentioned in the Institute of Chartered Accountancy of India, FDI policies mentioned in the ICAI study group and other policies. 

The Price water house cooper Netherlands made an agreement with PwC Kolkata of Rs. 41.42 crores to acquire the Mumbai based auditing firm named Dalal and Shah by giving interest-free loans to the auditing firm’s partners. But, this acquisition and giving interest-free loans to the partners of Dalal and Shah firm by the PwC Netherlands clearly violated the Benami Transactions (Prohibition) Act 1988, Foreign Exchange Management Act (FEMA), The Chartered Accountancy Act 1949 and RBI Master Circulars. 

According to the Chairman of the PwC India, PwC Netherlands donated whooping Rs. 240 Crores to different entities of the PwC India for the program of ’Enhancement skills’ between the year 2010-2011, This is the clear violation of the Foreign Direct Investment norms and rules and this is the impeccable evidence of foreign direct investment in Indian auditing firms and that’s why according to the appellant that PwC India is illegally running the Chartered Accountancy business in India by getting returns on the same amount and this is the clear violation of the CA Act 1949.

PwC India was found guilty of running a chartered accountancy business and was found guilty by both the Central Bureau Investigation and Special Investigation Committee in India. But, instead of getting prosecuted and curbing its illegal business by the government of India, it is flourishing and getting subsequent government contracts. 

Respondents

ICAI’s Response

The Institute of Chartered Accountancy of India is a professional body for accounting in India. It is a statutory body that was established under the Chartered Accountancy Act, 1949. The main function of the Institute of Chartered Accountancy is to regulate the chartered accountancy business in India, and to charge liable under the CA rules 2007, in which major role is played by the professional ethics of the chartered accountancy.

According to ICAI, it was said that it’s disciplinary committee has already taken cognizant action and has written a letter to all the major offices of PwC located in different metropolitan cities such as Delhi, Kolkata, Chennai, and Bangalore requesting an explanation from them. There was also a letter written to the Reserve Bank of India. All three PwC has stated they do not find any suspicious activities and hence they didn’t think any clarification from their side is needed. 

Only, PwC Kolkata has admitted that it had taken the sum of Rs. 28.97 crores for maintaining the quality standards from the PwC Netherlands. This is the clear evidence of Foreign direct investment in India. The disciplinary committee sent a reminder regarding this to the Reserve Bank of India, and the income tax commissioner to Kolkata and also to the Ministry of Finance to take a note of all these illegal activities going on in this.

Deloitte

According to Deloitte, Multi accounting firms (MAFs) are not multi ethnicities accounting firms, as their networking partners are run, controlled, and managed by the Indian entities. They do not receive foreign direct investment. 

According to it, the Indian accountancy firms pay the global network charges for the resources, infrastructure, and technologies to their parent companies situated in different parts of the world. This is the standard practice across jurisdictions. 

PwC (Price Waterhouse and Coopers)

PwC Netherlands does not have any partnerships or profits in any of its firms’ entities. It only receives network charges from its member entities that are located in different parts of the world. It works on the principle of no profit and no loss. Hence, PwC felt the need to grant some funds to PwC India for enhancement skills between the year of 2010-2011. They are not in the nature of the investment.

Hence, according to the PwC, there was not any violation of any Foreign Direct Investment rules because there was not any foreign direct investment made. Therefore, according to them, there is not a violation of Section 25 of the Chartered Accountancy Act 1949.

Reserve Bank of India

According to the Reserve Bank of India, it’s job is to only issue circulars under Foreign Exchange Management Act, 1999 and it is not the duty of the R.B.I. to probe and to do any investigation. 

Findings of the Court

Multi Accountancy firms (MAFs) are using the names of the international brands and their services by mixing their services into the services provided by the Chartered Accountancy. While many other Indian firms that are registered with the ICAI, they are using the same brand names as MAFs. The professional ethical codes which are mentioned in the Institute of Chartered Accountancy of India bans the advertising and fee sharing. ICAI protects the dignity and integrity of its members. 

According to the FDI and RBI guidelines, foreign firms or companies cannot make direct investment and the code of conduct prohibits the direct investment to the capital of the firm. There is clear evidence of remittances from the foreign firms but according to Indian firms they were not foreign direct investments, they were interest-free loans. Thus it is not possible to rule out the violation of the CA Act or FDI rules. Thus, appropriate action should be initiated.

The Court has not fully ruled out the violation of Section 25 of the CA because ICAI has not completed its inquiry whether the Indian firms just received payment or remittances from the foreign firms or they were included in the management and of chartered accountancy business too.

The ICAI was directed to set up an expert committee to observe whether the Multi Accountancy firms violated the guidelines of ICAI or not. Although the committee found them guilty no disciplinary action can be taken against them as they are not registered with ICAI. The court ruled that the premier institute must uphold the professional ethics of the profession.

The court ordered that a separate legal body is required for auditing work and updating existing work seems to be necessary. The court also depicted that the real beneficiaries of these MAFs are of foreign origin even though the company is registered in India and having Indian partners. They do not comply with the guidelines of the Institute of Chartered Accountancy of India not in a substantial manner but only in a superficial manner.

Finally, the court dealt with the foreign investment made to CA firms as a violation of the FDI rules and the guidelines mentioned in the ICAI and the CA Act 1949. It cannot be termed as mere interest-free loans for beneficial purposes. The court cited the example of income tax authorities in this, that the court cannot be treated as a grant for quality control if it is done to acquire the C.A. firm.

Order of the Court

The court ordered the formation of a three members expert committee which should be based on Sarbanes Oxley and dodd frank wall street reforms. The court ordered the committee to probe into the matter effectively and to see the implementation of the policies of FDI and FEMA regulations in an effective manner. 

The court asked the committee to suggest the remedial measures and suggestions for this. The committee to be constituted from the 2 months of the court decision and report to be submitted within 3 months from the constitution of the committee.

It is the responsibility of the ICAI to further investigate wherever possible.

Overview of the Judgement

There is clear evidence that the MAFs are taking remittances as a fund from the foreign-based accounting firms or entities. But the court is not certain or sure about it whether these are investments or loans. However, the court’s view is proved to be a grave obstacle with the working of MAFs and according to its view, it would disallow any type of foreign investment that is being made to MAFs by their parent firm located abroad. According to the court, RBI mandatory permission is required for all fund-related transfers.

However, this judgment is not that strict but it did put an end to all the malpractices and illegal activities that were carried out by the Multi Accountancy firms (MAFs) especially PwC in India. 

Conclusion

The court took a positive stand by giving a clear view and by restricting the illegal funding that is being carried out by the various multi accountancy firms in the name of investment free loans. This has completely halted the smooth functioning of various CA firms that were responsible for violating the various norms of FDI and ICAI guidelines.

Hopefully, soon the court will be able to take a clear stand on it. 

References

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