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Auditing Misconduct in India: Diversion of Law by Multi-national Accounting Firms.

Multi-National Accounting Firms (MAFs) are corporate persons who dominate the auditing market in the World. The Big Four Accounting firms in India – Deloitte, Ernst and Young, PricewaterhouseCoopers and KPMG, bags half the business from India’s top 500 listed firms and all the fortune 100 firms except one[1]. The billings of top 6 MAFs is more than the combined billings of the 40 top Indian Auditing firms.[2] They provide ruthless competition to the Indian firms as they maintain global quality standards and indulge in the advertisement of their services. The purpose of this blog is to illustrate how MAFs operate in India by circumventing the Indian legal framework and in breach of the code of ethics framed for Chartered Accountants of India.

The emergence of MAFs in India

MAFs sought permission from RBI to operate and render auditing services in India. But RBI vide its letter dated 23, March 2004, refused to grant such permission to MAFs. Due to such denial of permission, MAFs approached Foreign Investment Promotion Board to provide ‘consultancy’ services in India. After seeking the permission, MAFs transgress the permission granted to them and provide accounting, auditing and bookkeeping services in the name of ‘consultancy services’.

Furthermore, Regulation 3 of Foreign Exchange Management (Investment in firm of Proprietary Concern in India) Regulations, 2000 lays down that a person resident outside India other than NRIs/PIO are required to apply and seek approval of RBI for making investment by way of contribution to the capital of a firm or a proprietary concern or any association of persons in India.[3] As MAFs operate in India through their Indian affiliates, they circumvent the prohibition imposed on them by Foreign Exchange Management Act. MAFs take a circuitous route to invest in the Indian CA firms by remitting funds to the partners of these firms and recording them in the name of  ‘interest-free loans’ and ‘grant to partners’. In this manner, they acquire control of the Indian CA firms and carry out their business of accounting in their name. The expert committee by ICAI submitted a report titled ‘Report on Operations of Multinational Network Accounting Firms in India’, acknowledging that the government policies do not permit FDI in the field of accounting, auditing, taxation and bookkeeping services, but MAFs circumvent the legal framework to bypass this prohibition. [4]

Professional misconduct by MAFs

Apart from flouting the FEMA guidelines, FDI policies and RBI circulars, it appears that MAFs also indulge in brand building exercise and advertisements which amounts to professional misconduct for CAs in practice.  As per item (7) of Part 1 of the First Schedule of The Chartered Accountants Act, 1949 advertisement of professional services by a CA is not allowed anywhere other than their professional documents and visiting cards of the firm. The prohibition on the advertisement is based on a well-thought out background as the advertisement is harmful to the essence of the profession. The public should not be guided by self-proclaimed abilities but by the fundamental and underlying quality of service.

Indian CA firms by affiliating with the MAFs and using identical brand name indulges in brand building exercise, which gives an impression to the public that the Indian CA firms are not independent and have affiliations with MAFs. The visiting card circulated by Indian CA firms also bears the name identical to the MAFs. In order to abide by the Code of Ethics, it is imperative that the visiting card shows separation of identity. Auditing cannot be carried in an unprofessional way and in breach of the Code of Ethics of the profession. Publicity and advertisement is harmful to the objective of the profession as the users should rely on the real worth of services.[5] It further vitiates the level playing field with other Indian CA firms which follow the code of ethics and do not indulge in fee sharing and advertisement of their services.

Financial Misconduct by MAFs

Item (3) of Part 1 of First Schedule of the CA Act prohibits a member of the institute from accepting any part of the profits of the professional work, share, brokerage or commission from a non-member unless such person has certain prescribed qualification.[6] The MAFs provide funding to its Indian Affiliates in the name of ‘interest-free loans’ and grants for enhancement of skills. These financial aids violate the prohibition imposed on the members of the ICAI to receive grants from entities not registered with ICAI.

Despite the prohibition imposed by §.47(2) (h) of FEMA[7] on investments without RBI approval which prohibits investment by a person who is resident outside India, PwC India received Rs. 240 Crores in the Financial Year 2010-11.[8] Additionally, PwC Kolkata received a grant of 41 Cr. for acquiring another Mumbai based audit firm, Dalal & Shah by giving interest-free loans to four of its partners. It may be noted that the remittance which is claimed to be interest-free loans to partners squarely falls within the purview of investments. The Indian CA firms by sharing the same infrastructure and brand name with the MAFs cannot deny their relationship with the foreign entity. As a result, the actions of MAFs and their Indian affiliates are in contravention of the CA Act, FDI Policies and FEMA Regulations.


The paper narrated the circuitous approach of MAFs to operate in India in clear breach of Foreign Investment Policies, FEMA Act, RBI Circulars, The Chartered Accountancy Act and Code of Ethics for CAs. The MAFs being largely unregulated vitiates the level playing field with other Indian CA firms.

In order to curb audit malpractices and misconduct, the legislature proposed the addition of §.132 in the Companies Act, 2013 and recommended constitution of National Financial Reporting Authority (NFRA) to create an additional layer of supervision over and above ICAI, but limited its jurisdiction to members registered with ICAI. The newly added §.132 lays down that NFRA will have the power to scrutinize only registered members of ICAI. The impediment imposed on the jurisdiction of NFRA again leaves the MAFs unregulated as they never register themselves with ICAI.

Even the FEMA authorities have refrained from taking any action against the MAFs despite knowing the roundabout way taken by MAFs to invest in Indian CA firms, without RBI approval. It’s high time for the government and regulatory bodies to restrict the flagrant violation of laws by MAFs, especially when the apex court of the country has recognized the malpractice in S. Sukumar vs. The Secretary, Institute of Chartered Accountants of India.


[1]  The Big 4 Accounting Firms, Big 4 Career Lab, (Accessed May 22, 2018)

[2] Bad Times For Indian Auditors, Dept. of Accountancy, (Sept. 2016), (Accessed May 23, 2018)

[3] Ministry of Commerce & Industry Department of Industrial Policy & Promotion (2010). Consolidated FDI Policy. Clause 3 of §.3.3.2, pp.5, 109. Available on

[4] The Institute of Chartered Accountants of India (2011). Report on Operations of Multinational Network Accounting Firms in India. New Delhi, pp. 7, Clause 4.9

[5] S. Sukumar vs. The Secretary, Institute of Chartered Accountants of India and Ors., 2018(3)SCALE433, (India), ¶5

[6] Item Nos. 3, Part 1, First Schedule, the Chartered Accountants Act, 1949, No. 38, Acts of Parliament.

[7] 47. (1) The Reserve Bank may, by notification, make regulations to carry out the provisions of this Act and the rules made thereunder.

(2) Without prejudice to the generality of the foregoing power, such regulations may provide for,—

(h) any other matter which is required to be, or maybe, specified.

[8] Supra 5, ¶ 10.

Deferment of Payment on Transfer of Security: RBI fans India’s love affair with FDI

Reserve Bank of India recently made an amendment to the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 dated May 20, 2016 by way of insertion of new Regulation 10A (“Regulation”). The new Regulation provides that when a transfer of shares/security between a resident buyer and a non-resident seller takes place, twenty five per cent of the total consideration can be paid by the buyer on a deferred basis within eighteen months from the date of the transfer agreement. This window of time provided to make the total payment comes as a welcome change as it enables the buyer to get some additional time to make the payment. In other words, this window of eighteen months shall prove to provide some relief and financial ease to the buyer with respect to closing the transaction.

Earlier, when an investor wanted to transfer his shares, the total consideration for such transfer was to be paid upfront at the time of taking delivery and an escrow mechanism was permitted (with several restrictions) under the automatic route for a maximum period of only six months. This led to a number of complications especially when Options Contract(s) were in place, as the person making the purchase had to arrange for a huge sum of money in a short period of time. Adding to the woes of the parties was the fact that the RBI had disallowed the fixation of a price prior to exercising such an Option. Consequently, it often led to sudden realization of one’s financial obligations and the mounting of an unanticipated burden when the price of the security was determined at the time of exercising the Option.

A concern which may arise is the loss one party may incur because of the fluctuating currency exchange rates, however, this has been addressed by the Regulation itself as it provides for an escrow arrangement for the allowed twenty five per cent between the buyer and the seller, if both parties mutually agree.

Alternatively, an indemnity may be furnished by the seller for twenty five per cent of the consideration for a period of eighteen months if buyer pays the entire consideration to ease up the financial burden on him. This would act as a deterrent to litigious claims as payments will be guaranteed even in situations where the buyer may default on his dues.

The amendment plays out favorably for the buyer in two ways; it gives him a comfortable timeline to meet his payment obligations while using it to protect himself from any breach of warranties on part of the seller by securing the indemnity rights. Secondly, it gives him a financial edge by saving him the expense of payment of interest for a period of eighteen months on such deferred payments.

However, there are some ambiguities in the Regulation with regard to determining who the constructive owner of the shares would be during the eighteen month period of deferment till the closing of the transaction. This may become a point of contention when benefits are to be conferred on members like payment of dividend, issue of bonus shares and so on. There is also no time period prescribed for the payment of indemnification in case of a default by a buyer with regard to payments to be made to the seller if it’s not decided by the parties contractually.

On the whole, this will be widely hailed as a move on part of the Government to make the transfer/issue of shares and securities smooth and easy. It is also indicative of the government’s increasing liberal outlook on making entry and exit from the Indian markets more conducive to investors by bringing it in line with the globally accepted risk allocation mechanisms. Coupled with other initiatives like Make in India and the thrust on bringing in Foreign Direct Investment, this amendment will surely bring more goodwill and trust in the Indian institutional setup.