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Supreme Court puts the spotlight on audit firms
February, 27th 2018

The Supreme Court on Friday put the spotlight on the Big Four multinational accounting firms, directing that a committee be set up to tighten regulatory oversight over them.

The order issued by the apex court directed the Union government to constitute a three-member committee of experts to scrutinize the existing regulatory regime and propose changes if required.

The ruling comes at a time when the role of auditors is already under scrutiny for their failure to detect the Rs11,400 crore fraud allegedly perpetuated by group firms of jewellers Nirav Modi and Mehul Choksi in collusion with officials of state-run Punjab National Bank (PNB).

“Financial statements audited by qualified auditors are acted upon and failures of the auditors have resulted into scandals in the past. The auditing profession requires proper oversight,” the court observed.

The committee has to be set up within two months and will thereafter be required to submit its findings to the Supreme Court in three months.

While the order made clear that framing a policy was the domain of the executive, the judiciary was perfectly within its rights to examine whether policy safeguards are in place and implemented.

The order was passed in a plea by the Centre for Public Interest Litigation (CPIL), a non-profit organization, seeking a probe into allegations of FDI violations and malpractices by UK-based audit firm PricewaterhouseCoopers Pvt. Ltd (PwC) and its associated companies.

PwC did not respond to emails seeking comment.

The order was delivered by a bench comprising justices Adarsh Kumar Goel and U.U. Lalit.

Ongoing investigation by the Enforcement Directorate into allegations of violations and malpractices by PwC have to be completed within three months.

Setting out the terms of reference of the expert group, the Supreme Court order said it would need to consider the need for an appropriate legislation or mechanism to govern the profession of auditors.

Apart from calling for suggestions from concerned authorities, it may also consider steps for effective enforcement of the provisions of the FDI policy and the Foreign Exchange Management Act, 1999, the order said.

CPIL, in its petition, had contended that there was a huge inflow of money due to FDI violations by PwC and other firms under its umbrella.

It further alleged that improper certification was being granted to auditors by the firms and payments worth hundreds of crores were being directed by way of subsidies, export incentives, grants etc., causing loss to the exchequer.

“The primary objective of an audit is to lend credence to the financial statements for conformance to accounting standards, presentation and disclosures, and not towards detection of all frauds. For detecting frauds, forensic audit would need to be carried out,” said Kamlesh Vikamsey, former president of Institute of the Chartered Accountants of India.

“The primary objective of an audit is to lend credence to the financial statements for conformance to accounting standards, presentation and disclosures, and not towards detection of all frauds. For detecting frauds, forensic audit would need to be carried out,” said Vikamsey.

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