Shoddy auditing has led to scandals in India: Supreme Court tells Centre
At a time when the entire banking system is struck hard by the unpaid loans of billionaires with the increasing kitty of bad debts, the apex court has come down heavily on the role of international audit brands operating in India.
Supreme Court in its judgment has said that currently there is no regulatory framework for an efficient management and Centre must bring in a law on this issue.
The bench led by Justice A.K Goel and UU Lalit delivered the judgment on a plea seeking an investigation into Pricewater House for their role in Satyam scam.
Centre for Public Interest Litigation has filed a plea seeking investigation against PwCPL for allegedly violating rules of RBI, further operating against the FDI norms in the country. For eight years, Pricewater House was Satyam's auditor.
The bench further said that though policymaking is the domain of the executive but ensuring a regime for the enforcement of fundamental rights is of paramount importance.
The court has also asked a three-member panel to be formed within two months. The panel has to probe and come up with the changes that are required in the present regulatory regime.
This judgment by Supreme Court has highlighted the patches in the existing regulatory mechanism with respect to auditing, and also emphasized that international brands who work with the Indian partner cannot shrug off their responsibility merely by relying on the technical argument that the international partner has a limited role.
The court also made a finding that international brands are the key beneficiaries of such arrangements with Indian companies.
WHAT SUPREME COURT SAID:
The Supreme Court has laid down that there is a bar under CA Act (chartered accountant) to practice as CAs for a company which includes a limited liability common partnership which has company as its partners. The code of conduct for the CAs prohibits fee sharing, advertisements.
But certain auditing firms working with international brands are mixing other services ( a practice which is a violation of the rules) by using their brand value.
These companies called the Multinational Accounting Firms are not registered with Institute of Chartered Accountancy in India and hence a regulatory regime is completely missing.
The Supreme Court has asked for a regulatory mechanism to be set up in line with laws existing in countries like USA and UK.
Criticizing the approach taken by the expert panel formed by the ICAI, the Supreme Court said that the committee took a hyper-technical view that despite these MAFs violating the law, they do not fall under the present regulatory framework as they are not registered.
Commenting on the role of ICAI, the court said, Premier professionals body cannot limit its oversight functions on technicalities and is expected to play a proactive role for upholding ethics and values of the profession by going into issues that are connected and incidental.
The auditing firm in its defense had argued that it works in a limited capacity in India and merely provides an oversight to uphold the audit standards.
The court also observed how shoddy auditing has led to scandals in the country. The bench said, 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 in scandals in the past.
Further to the detriment of the PwC, the court also said that the current MAF structure was just a way to bypass the regulatory framework and the foreign entity is the key beneficiary from such partnerships.
Citing the report of the Expert Committee, the court said that there is no substantial compliance by firms which partners with foreign firms. The court is also of the view that there is a need to separate auditing function from consultancy roles to ensure greater independence of auditors.
The court has also asked the Enforcement Directorate to complete its probe within three months against PwC.