Delhi High Court Empowers ICAI to Hold Audit Firms Accountable:
In a recent ruling on July 3, 2024, the Delhi High Court confirmed that the Institute of Chartered Accountants of India (ICAI) has the power to take disciplinary actions against audit firms like Price Waterhouse & Co and KPMG affiliate BSR and Associates for professional misconduct. This ruling emphasizes that not only the individual partners but the firms themselves are answerable to the ICAI’s disciplinary committee.
The court’s ruling accelerates the implementation of the Chartered Accountants, the Cost and Works Accountants and the Company Secretaries (Amendment) Act, passed in April 2022. This amendment allows for misconduct proceedings against CA firms, extending accountability beyond individual accountants. The government has been directed to notify these amendments promptly.
Additionally, the court instructed ICAI to initiate consultations to develop a framework for the operation of multinational accounting firms in India. The court acknowledged the importance of these firms in bringing global best practices to India and their significant contribution to Indian businesses on a global scale. This framework will address issues related to licensing agreements and brand usage among other aspects.
The ruling clarified the audit regulatory functions divided between the ICAI and the National Financial Reporting Authority (NFRA), with the ICAI reviewing audits and the NFRA overseeing auditors of listed entities. It also dismissed the ten writ petitions filed by partners of these audit firms, deeming the stay orders on disciplinary proceedings unnecessary.
Earlier, nine partners from PwC and KPMG-affiliated firms had contested the disciplinary proceedings, arguing no violations under the CA Act and that individual members should not be held responsible. However, the court stressed that in cases involving global networks, the entire firm must be accountable, not just individual members, to ensure the Act’s efficacy.
ICAI President Ranjeet Kumar Agarwal welcomed the order, noting that it empowers ICAI to address matters related to global networking among audit firms. He highlighted that international networking guidelines are in progress and will be implemented this year following the Ministry of Corporate Affairs’ advice.
The core of the dispute between ICAI and the Big Four firms, such as Price Waterhouse and KPMG, lies in their global affiliations. ICAI contends that domestic affiliates of these firms benefit from shared resources, methodology, knowledge, and expertise, and pay 2.5% of their revenues to their international counterparts. This arrangement, ICAI argues, violates the CA Act, as the domestic firms function cohesively within the multinational entity.
Delhi High Court Empowers ICAI to Hold Audit Firms Accountable
This ruling marks a crucial step towards greater accountability and regulation of multinational audit firms operating in India, ensuring adherence to professional standards and legal requirements.“The site is for information purposes only and does not provide legal advice of any sort. Viewing this site, receipt of information contained on this site, or the transmission of information from or to this site does not constitute an attorney-client relationship. The information on this site is not intended to be a substitute for professional advice.”