White Collar Crimes In The Context Of Multinational Accounting Firms

White Collar Crimes In The Context Of Multinational Accounting Firms

The Supreme Court of India, on 23^rd February, 2018, in case titled as the S. Sukumar versus the Secretary, Institute of Chartered Accountants of India and Others [1] passed three directions:

First, it directed the Central Government of India to constitute a Committee of Experts with the following terms of reference:

1. To revisit the legal framework governing Multi-National Accounting Firms (MAFs) in particular reference to sections 25 [2] and 29 [3] of the Chartered Accounts Act, 1949;
2. To consider the need for legislation on the lines of the Sarbanes Oxley Act, 2002 and Dodd Frank Wall Street Reform and Consumer Protection Act, 2010;
3. To examine whether the auditors need separate oversight owing to a conflict of interest in the working of consultants and auditors.

Secondly, the Central Board of Direct Taxes (CBDT) was asked to complete its investigation on the conduct of MAFs in India and thirdly, the Indian Chartered Accountants Institute to examine other ‘related’ issues.

The Committee of Experts has been given three months to submit its report. The background of the case is interesting and may be of interest to chartered accountants in Pakistan. The facts, as narrated in the judgment, stated that in India, ten audit firms namely PriceWaterhouse (PW), Lovelock and Lewes (LL), Price Waterhouse Bangalore, Price Waterhouse & Co. Kolkata, Price Waterhouse Delhi, Price Waterhouse & Co. Delhi, Price Waterhouse & Co. Chennai, Dalal& Shah Mumbai and Dalal& Shah Ahmedabad and PwCPL (PwC India) were operating. The operation of chartered accountant services through limited liability companies has been prohibited by Section 25 of the Chartered Accountants Act, 1949. Likewise, the services of such MAFs was also prohibited by Section 29 of the Act of 1949 that prohibited the operation of such service businesses without reciprocal permissions for Indian firms. The legality of operations of such MAFs was coupled with the fact that India had witnessed massive white collar related scams such as ‘Satyam Scam ’[4]. The judgment of the court also discussed other issues like taxation of the MAFs and compliance with Company Law.

A plain reading of the directions passed by the court shows that it was lenient to MAFs insofar as enforcement of the law was concerned. The usual problem of dealing with white-collar crimes and their perpetrators with velvet gloves can be discerned throughout the judgment. The corporate crimes do not take place in an impetuous manner; their actus rea constitute non-compliance within the operating framework. The line between an audit objection and actual fraud is usually very thin. Illegalities breed illegalities. The approach taken by the court may be congenial for the health of the economy, but it may not be healthy for the rule of law where all are to be treated equally.

What is in it for Pakistan? For Pakistan, the judgment may be instructive of the fact that law enforcement in this field has to go beyond persuasion, while corrective measures may be taken as MAFs reinsure the financial system of a country. In comparative terms, the law in Pakistan does not have the reciprocity clause for international accountancy firms with respect to offering their services. In any case the judgment may have have normative value for future course of action.

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References:

[1] http://www.advocatekhoj.com/library/judgments/announcement.php?WID=9793

[2] 25. Companies not to engage in accountancy (1) No company, whether incorporated in India or elsewhere, shall practise as chartered accountants. 3[Explanation − For the removal of doubts, it is hereby declared that the “company” shall include any limited liability partnership which has company as its partner for the purposes of this section.] (2) If any company contravenes the provisions of sub-section (i), then, without prejudice to any other proceedings which may be taken against the company, every director, manager, secretary and any other officer thereof who is knowingly a party to such contravention shall be punishable with fine which may extend on first conviction to one thousand rupees, and on any subsequent conviction to five thousand rupees.

[3] 29. Reciprocity (1) Where any country, specified by the Central Government in this behalf by notification in the Official Gazette, prevents persons of Indian domicile from becoming members of any institution similar to the Institute of Chartered Accountants of India or from practising the profession of accountancy or subjects them to unfair discrimination in that country, no subject of any such country shall be entitled to become a member of the Institute or practise the profession of accountancy in India. (2) Subject to the provisions of sub-section (1), the Council may prescribe the conditions, if any, subject to which foreign qualifications relating to accountancy shall be recognised for the purposes of entry in the Register.

[4] In 2009, a big Indian computer company named Satyam Computer Services Limited was accused of corporate fraud. In the scam, the PricewaterhouseCoopers, the accounting firm, was fined 6 Million Dollars as fine by the US Securities and Exchange Commission besides administrative and legal actions against the company and its auditors in India.

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