MUMBAI: The Big Four affiliate firms doing audits are poised for a drawn-out legal clash with The Institute of Chartered Accountants of India (ICAI), centering on association with global entities, resource sharing and control, and referral fees, prompted by the institute's disciplinary committee directive to EY affiliates to cease existing arrangements with multinational entities (EY Global), citing violation of the Chartered Accountants Act 1949.
The committee also ordered the removal of two of the affiliate firms' partners (now both retired) for three years and imposed a fine of ₹5,00,000 on each, requiring a compliance report within 90 days. The EY affiliates in question were SV Ghatalia & Associates, SR Batliboi & Associates LLP, SRBC & Co. LLP, and SR Batliboi & Co. LLP.
On Thursday evening, the institute uploaded the order to its website, causing a stir in the audit fraternity.
Sensing a similar negative order, concerned partners of PwC affiliates had obtained a stay order from Telengana and Punjab & Haryana High Court against ICAI's disciplinary action a couple of weeks back. Similarly, BSR & Co. (a KPMG affiliate) partners under investigation also secured a stay order from a Punjab and Haryana High Court last week. Last year, Deloitte partners had already obtained a stay order from the Delhi High last week. Last year, Deloitte partners had already obtained a stay order from the Delhi High Court against the disciplinary proceedings of the hearing.
The EY affiliate firm, SRBC & Co LLP spokesperson told ET that they will explore all issues raised in the order and explore options under the law including the appeal process. However, the problem is that the appellate tribunal, which is supposed to hear appeals, has not yet been set up by the institute. "The order focused only on procedural matters, not audit quality, and will not affect the future of the audit firms in any way" said a leading lawyer who works closely with Big Four firms on regulatory matters. Deloitte, KPMG, and PwC did not respond to the ET questionnaire on the matter.Though the EY matter is old, the latest clash between ICAI versus multinational networks started in 2016-17 when the institute had sent requests for information/clarification and, in 2018 followed it with a Prima Facie Opinion (PFO) to 171 network firms operating in India asking them to submit documents and statements.
Thereafter, the matter was referred to the disciplinary committee of the institute for further investigation.Several firms had networking arrangements with international networks for several decades and ICAI had issued guidelines for network firms multiple times, most recently in 2011. That set of guidelines was subsequently repealed and, in 2022, the institute issued guidelines for domestic networks but has yet to establish guidelines for international firms.
Experts point out that the issue of whether multinational firms are circumventing the provisions of the Chartered Accountants Act 1949 is an old one which keeps resurfacing and evolving.
In 2009, a high-powered committee of ICAI issued a report against Big four firms and international network firms. In 2016, the MCA convened an expert group chaired by Ashok Chawla to address concerns of domestic audit firms on 'restrictive shareholder covenants'. Their findings classified affiliated firms as Multinational Network Accounting Firms (MNAFs), distinguishing them from MAFs due to Indian nationals' control and management, despite global network affiliation.
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