Frame a law to oversee auditors, Supreme Court tells Centre

Their failures have resulted in scandals in the past: Bench

The Supreme Court on Friday directed the government to frame a law to regulate the auditing profession, saying “failures of auditors have resulted in scandals in the past.”

In a judgment, a Bench of Justices A.K. Goel and U.U. Lalit highlighted the manner in which multi-national accounting firms violate auditing and financial laws.

The apex court said these firms comply with Indian laws and code of ethics only in form and not in substance.

The judgment came on a petition filed by the Centre for Public Interest Litigation seeking an investigation into PricewaterhouseCoopers Private Limited (PwCPL) and their network audit firms operating in India for alleged violations of Foreign Direct Investment (FDI) policy, the Reserve Bank of India Act (RBI) and the Foreign Exchange Management Act.

The petitioner said how “Pricewater House, Bangalore, was the auditor of the erstwhile Satyam Computer Services Limited (Satyam) for more than eight years but failed to discover the biggest accounting scandal which came to light only on confession of its Chairman in January 2009.”

“PwC is responsible for the violations by Satyam scam, failure of the Global Trust Bank (GTB) and UB Group (Kingfisher Airlines) for which action ought to be taken... SFIO and CBI have found PwC guilty. Still, the PwC firms have not been prosecuted and have been awarded government contracts such as GST Suvidha Provider for GST Network, consultancy contract by the Kerala government for preparing master plan to connect Kochi with industrial corridor of south India,” the Supreme Court judgment referred to the petitioners’ pleas.

PwC strongly objected to the allegations.

The court concluded that a “case is made out for examination not only by the Enforcement Directorate and further examination by the ICAI but also by the Central government having regard to the issues of violation of RBI/FDI policies and the Chartered Accountants Act by secret arrangements.” The court directed the ED to complete its probe in three months.

Panel of experts

The apex court directed the Centre to constitute a three-member committee of experts within two months to frame a law for an oversight mechanism over auditors.

Directing the Centre to constitute a three-member committee of expertswithin two months to frame a law for an oversight mechanism over auditors, the judgment said auditing is a profession of great importance to the country’s economy. .

The court said the absence of an adequate oversight mechanism had the potential of infringing public interest. ‘Auditing business is required to be separated from the consultancy business to ensure independence of auditors’.