The Company Law Committee under corporate affairs secretary Injeti Srinivas has proposed that an entire audit firm need not be banned just because a few of its auditors are found to have been lax in their duty or colluded with the management of a company in perpetrating a fraud.
If finally implemented, such a move could have important ramifications for key firms, including PwC India, Deloitte Haskins & Sells and BSR & Associates (part of the KPMG network). PwC India is in the midst of a legal tussle over a two-year ban slapped on it by Sebi due to the alleged role of some of its auditors in the Rs 7,800-crore Satyam scam. Deloitte and BSR recently got interim relief from the Bombay High Court after the government had sought a ban on them for five years for the alleged involvement of their auditors in the IL&FS scandal. Under the existing framework, audit firms are not adequately immune to disbarment even for the action of only some of their auditors.
The ban, the committee feels, should be limited to only those auditors who are found to be guilty and the firms may ordinarily be let off with a hefty fine, if required. However, strict action can be considered against the firms if it’s proved that they are obstructing the course of justice, a senior government official told FE.
The committee’s latest proposal, however, will be discussed at length with various financial sector regulators, especially Sebi and the Reserve Bank of India (RBI), before a decision is made. Subsequently, the process of amending the Companies Act and the Chartered Accountants Act will be initiated to implement such a decision, he added.
According to the panel’s report, while the provision under Section 140(5) of the Companies Act operates once the final determination of fraud is made by the NCLT, Section 132(4) (B) gives power to the National Financial Reporting Authority to decide on the total tenure of debarment, after due process, based on facts and circumstances. “In either case, there is no provision to limit the debarment in case of an audit firm to the partner(s)
who were actually involved in the wrong doing.
THE COMMITTEE was of the opinion, that there may be cases,where only one or a few individuals/partners connected with such firm may be actually responsible for the fraud. In such cases, making the entire firm responsible for the actions of few individuals may be disproportionate,” the report said.“The issue of vicarious liability of the firm was also considered and it was felt that heavy monetary penalties on the firm could be considered, instead, in such cases,” it added.
Hailing the panel’s recommendation, Pavan Kumar Vijay, founder of Corporate ProfessionalsGroup, said:”The existing framework of law unfairly deals with the situation, particularly where there is alarge firm of auditors and one partner acts in a fraudulent manner or colludes in a fraud, with the entire firm getting blamed and consequently getting debarred from acting as auditor.
Such a legal dispensation acts as a roadblock in the formation of large firms of professionals which is the need of the hour to become internationally competitive.” Vijay Kumar Gupta, insolvency professional at KVG Insolvency Advisors and former member of the central council of the Institute of Chartered Accountants of India, said:“Thebigquestionis as to who indulged in dubious practice–individual auditor/s or the entire audit firm?” Instead of blaming the entire firm, the law must punish only the guilty.