In a landmark ruling, the Delhi High Court has empowered the CA Institute’s Disciplinary Committee (DC) to take action against an entire CA firm even when no single individual can be held responsible for the allegations in a complaint.

Dismissing a batch of 10 writ petitions filed by partners from firms including BSR and Associates LLP, Price Waterhouse and Lovelock & Lewes, Justice Prathiba M. Singh ruled that the DC is free to proceed against the firm as a whole or its individual members, as deemed appropriate, in response to allegations of professional misconduct.

The main question that arose in the ten writ petitions was whether CA Institute can take action against chartered accountant firms under the CA Act or is the ICAI empowered to only take action against one person, who is identified by the firm as a “member answerable”?

The petitioners had contended that ICAI lacks the authority to proceed against partners who are not specifically named or identified as responsible for the alleged misconduct. Had this argument been accepted by the Delhi High Court, then the ICAI would in effect only have the power to take action against the persons identified as ‘members answerable’ by the firm itself, and not against the firm as a whole.

Significant ruling

The latest Delhi HC ruling is significant as post the break out of Satyam scam in January 2009, the CA Institute has been taking a stance that it enjoyed power to proceed against the erring firm. This stance was however challenged by audit firms contending that no explicit provision existed in law to penalise or proceed against the firm.

However, with the amendments introduced in year 2022 to the CA Act, the audit firms too were brought under disciplinary mechanism. The only issue has been that the Corporate Affairs Ministry (MCA) has so far not notified this disciplinary mechanism related provisions.

Noting that CAs are like “gatekeepers” of the financial system, Singh underscored the need for a proper mechanism to ensure that there is no misconduct and to preserve the robustness and the integrity of the profession. 

“If firms are permitted to only pin down one single individual in respect of alleged misconduct spanning over decades, the entire purpose of the Act and the Rules would be completely defeated,” Singh said in a 71 page order issued on Friday.

Directions to MCA 

The Delhi High Court has in this latest ruling directed MCA to strengthen the Institute of Chartered Accountants of India (ICAI) by “expeditiously” notifying the amendments passed by the Amendment Act of 2022.

It has also asked MCA to undertake a consultation in order to clearly set out the framework in which multinational accounting firms (MAFs), whose presence is also necessary in India, can operate. 

“Such firms (MAFs) also contribute in bringing global best practices to India with immense opportunities for youngsters. They also render services to Indian businesses even at a global scale. Thus, the provisions relating to licensing agreements, brand usage etc., also need to be looked into,” Delhi High Court order said.

This latest ruling is significant as MCA has so far not implemented the crucial disciplinary mechanism-related changes introduced in the Chartered Accountants, the Cost and Works Accountants and the Company Secretaries (amendment) Act 2022. 

It had however in May 2022– just over a month since enactment of this law in Parliament—put into effect most provisions of this law.

This amendment law had among other changes overhauled disciplinary mechanism in three professional institutes. It mandated that a non-member would become the presiding officer of the disciplinary committee in these institutes. However, a solace for the institutes is that the government would be appointing the officer only out of the names recommended by their respective central council.

As part of the revamp of the disciplinary committee, the law had brought a change in its composition so as to introduce a 2+3 formula (two institute nominees and three non-institute members).

Meanwhile, Amarjit Chopra, Past President of ICAI, said that the Delhi High Court ruling strengthens the hands of the CA Institute and is a welcome step. After Satyam scam, ICAI had approached the government and conveyed that under exceptional circumstances it should be allowed to proceed against the erring audit firm, he added. The relevant amendment happened only in 2022.

ICAI’s concerns

It maybe recalled that the CA Institute had said — prior to the enactment of the law in 2022–that the disciplinary committee revamp was not the best outcome for it and therefore, had written to the MCA seeking a re-look at the provision. 

The ICAI had preferred continuation of the earlier 3+2 formula and had also submitted that the presiding officer has to be a member of the institute and a chartered accountant for the disciplinary mechanism to work efficiently. However, these views did not find acceptance with the Centre.