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Indian Regulator Claims Big Four Are Bending Rules

April 6, 2010

The Big Four’s affiliate firms in India may be circumventing the country’s laws by providing services such as auditing, tax, accounting and bookkeeping when they only have permission to do consulting, a powerful regulatory committee charges.

A committee of the Institute of Chartered Accountants of India has been probing the causes behind the accounting fraud at the Indian outsourcing giant Satyam Computer, which was audited by an affiliate of PricewaterhouseCoopers. India does not allow foreign direct investment in accounting, tax, auditing, bookkeeping and legal services, so U.S.-based multinational firms typically set up an Indian affiliate, according to the Times of India.

However, a report by the ICAI committee, headed by the organization’s former president, Uttam Prakash Agarwal, said the Big Four could be circumventing Indian laws by providing assurance, management and related services through their affiliates, according to the Hindustan Times.

“These entities are not only providing services through their own establishment in India, but also through service providers in India, particularly for those services like auditing, which cannot be rendered by them under the laws of the country,” said the report.

The Big Four, as well as their somewhat smaller brethren like Grant Thornton and BDO, are known to be especially careful in how they set up their international networks vis a vis their member firms in various countries, including the U.S. But it seems they are going to need to take a fresh look at how they are structuring their operations in India, or they could find themselves unwelcome guests there.

Comments (1)
Strictly speaking, ICAI is not Indian accounting regulator. ICAI is basically an accounting Institute established by an Act of Parliament for regulating chartered accountancy profession whose members are empowered to do financial audits. Although it frames accounting standards, these need to be confirmed by NATIONAL ADVISORY COMMITTEE ON ACCOUNTING STANDARDS BOARD (NACAS)to enforce the standards.

Moreover there is another statutory accounting institute in India by name, INSTITUTE OF COST & WORKS ACCOUNTANTS OF INDIA, to regualte the profession of cost & management accountancy. Under Indian law, companies falling under certain industries would be ordered to undergo statutory cost audits which could be effectively done by only cost accountants who are members of ICWAI.

So there are two types of public accountants in India - Financial auditors (chartered accountants) & cost auditors (cost & management accountants).

As per the best international accounting practices, there is a need for establishment of independent body in the mode of PCOAB, to regulate the accountancy profession in India - establishment of accounting standards, disciplinary actions against erring public accountants (covering both financial & cost audits), peer review etc.

Moreover, there is a strong case for opening up public accountancy profession in India in the public interest as the clients would be provided a wider choice.

At present, the record of ICAI in enforcing punishments for its erring members has been dismal. Instances are GTB scandal, Satyam scam etc., wherein the public perception is that ICAI is unable to take quick action against its erring members. It is better that the job of disciplining the public accountants left to an independent regulatory body rather than to the Institute itself. This would be in best interest of the accountancy profession in India.
Posted by bvprabhakar | Thursday, April 08 2010 at 1:07AM ET
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