How MNC audit firms duck scrutiny

A Committee should consist of three men, two of whom are absent” — this quote is attributed to the English actor, Sir Herbert Beerbohm Tree.

The three members of the Committee of Experts — appointed by the Supreme Court to look into the working of multinational accounting firms (MAFs) in India — did not have the luxury of being absent from any of the nine meetings they had, to deliberate on the topic assigned to them. The Committee recently submitted its report concluding that it’s a misnomer to use the term ‘multinational accounting firms’ as most of their partners are from India.

As a part of this assessment, they have also dished out some advice on regulating the accounting profession in India. The report is typical of most Committee reports in India — it avoids controversial areas in the task assigned, is useful in bits and pieces but leaves quite a few questions unanswered.

The call to look into the workings of MAFs is not new in India. In 2003, a body named the Chartered Accountants Action Committee for Level Playing Field (CAACLPF) published a “ White Paper on Multinational Accounting firms operating in India”.

The simple message in this White Paper was these accounting firms are operating in India with tremendous lobby power to the detriment of Indian firms. CAACLPF’s fight was against the culture of dominance. Though no radical legislation was passed after the release of the White Paper, CAACLPF was able to ensure that the methods and working of the international accounting firms were brought to the notice of the regulators.

The Satyam jolt

The culture of dominance of these firms continued unabated — and then Satyam happened. Much time has been spent on the Satyam saga but it would be extremely naïve to say that the auditor was simply not aware of fake invoices being generated a couple of rooms away from where the audit was being conducted. The Satyam and Sahara sagas forced the government to amend the Companies Act in 2013 with draconian provisions to imprison anyone — at least on paper — who transgressed the provisions. Some more Committees were formed but the absence of action was glaringly obvious. In 2017, a chartered accountant decided to approach the Supreme Court.

The plea before the Supreme Court was plain and simple — whether these MNC accounting firms 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.

After examining a whole bunch of issues, the apex court instructed the government to form a three-member Committee look into the question of whether 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 in order to regulate international accounting firms. The Committee was also asked to looked at legislations such as the Sarbanes Oxley Act, 2002 and Dodd Frank Act or any other appropriate mechanism for oversight of profession of the auditors.

It was also asked to look into whether, on account of conflict of interest of auditors with consultants, the auditors’ profession may need an exclusive oversight body. It may also consider steps for effective enforcement of the provisions of the FDI policy and the FEMA.

Committee of Experts report

After issuing questionnaires and talking to those who matter, the Committee of Experts concluded that the international audit firms are set up as partnerships or Limited Liability Partnerships (LLPs) under Indian laws and all their partners are members of the ICAI.

Therefore, there is neither any violation of Section 29 (reciprocity) nor any violation of Section 25 (companies not to engage in accountancy) of the Chartered Accountants Act, 1949.

Since these firms follow various internal processes, policies and methodology adopted by their respective networks internationally, they should be subject to necessary checks and balances.

The Committee of Experts responded to the Supreme Court’s request to consider legislations like the Sarbanes Oxley Act by stating that the just-set up National Financial Reporting Authority (NFRA) should solve all problems, once operational. Opening up professional services to competition is necessary and therefore, audit firms should be allowed to advertise with some restrictions. The Committee concluded by stating that laws must be rationalised to promote Multi-Disciplinary Practices (MDPs) to allow firms to offer a bouquet of high quality professional services at par with international standards.

One wonders if the Supreme Court would be pleased with the report of the Committee. It had asked the Committee to consider steps for effective enforcement of the provisions of FDI policy and FEMA since the accounting firms claim that they receive funding in the form of grants and not capital.

The steps for effective enforcement that the Committee has recommended are insipid, as is the assertion that only the Ministry of Home Affairs can verify the veracity of the funding received. It is also surprising that the report of the Committee does not even once mention the working of the Serious Frauds Investigation office — an earlier version of NFRA.

Permitting accounting firms to advertise would only strengthen the culture of dominance of the large accounting firms since the unwritten rule in advertising is that only those with deep pockets can afford to do so. The suggested MDPs are also tilted in favour of the large accounting firms since they already have such practices in various structures — Indian firms would always be a few laps behind in every race.

The report maintains a stoic silence on the conflict of interest between consulting and accounting roles that many of the international firms offer. It is clear that the Committee has not pierced the veil under which the international firms operate but just answered a few questions asked by the apex court. Piercing the veil of all their operations could throw up many surprises.

The culture of dominance of the international accounting firms continues.

Bespoke tenders are worded in such a manner that only these firms can even bid for them, single tenders are issued to suit them and they appear to wield some influence at every level.

One would have expected the Committee to suggest measures so that Indian accounting firms can compete with international accounting firms on a level playing field. If anything, the Committee is planning to make the playing field even more uneven.

The only solution would be for a few mid-level Indian accounting firms to get together, get generous funding from a sponsor and take on the international accounting firms assignment for assignment.

On the part of the regulators, they should legislate and rigorously implement stringent non-monetary penalties (such as blacklisting) against any firms (national or international) that are found guilty of misconduct — they need not appoint a Committee for this as there are enough and more provisions in various Acts in India. All that is required is intent.

The writer is an independent chartered accountant

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