New Delhi: Global accounting giants operating in India in association with local firms may have to make greater disclosures, a person aware of the matter said, even though no restrictions are likely for such operations. The disclosures could relate to the flow of funds between the foreign and the local firm and details of existing structures.

The rules to be framed in this respect will be enforced by the National Financial Reporting Authority, a new regulator recently set up for accounting and auditing firms, the person cited above said on condition of anonymity.

The big four global consulting and accounting firms are present in India through their network firms. S.R. Batliboi is EY’s network firm performing the audit function in India; Deloitte Haskins and Sells is part of Deloitte’s network; BSR and Co. is part of KPMG’s network and PriceWaterhouse is part of PwC’s network.

“We have to look at the practices in other countries. The point is whether the practice of multinational consultancy firms having networking arrangements with local audit firms gives a net benefit to the country. There is a case to believe so. Networking is a kind of collaboration, not parent-subsidiary relationship. Matured economies do not overnight invalidate established practices. It is not wise to throw the baby with the bathwater," the person cited above said.

Emails sent to EY, Deloitte, KPMG and PwC last week were not answered.
This comes at a time of some of these firms have been under scrutiny following allegations of flouting rules laid down under the Foreign Exchange Management Act and for the existing relationships between the network firms.

In February, the Supreme Court had asked the government to look into the matter through a three-member expert committee, after receiving petitions from Indian auditors challenging the way these global firms operate in the Indian audit space through their network firms affiliated with the Institute of Chartered Accountants of India (ICAI).

The committee is expected to submit its report to the government soon.

The government will submit it to the Supreme Court and follow the court’s instructions, the person quoted above said.

The court had noted that there is “compliance by multinational audit firms only in form and not in substance, by having got registered partnership firms with the Indian partners, the real beneficiaries of transacting the business of chartered accountancy remain the companies of the foreign entities. The partnership firms are merely a face to defy the law."

The court had pointed out that the principle of lifting the corporate veil has to apply when the law is sought to be circumvented.

“While the company is a separate entity, the court has come to recognize several exceptions to this rule. One exception is where corporate personality is used as a cloak for fraud or improper conduct or for violation of law....If the premises are same, phone number/fax number is same, brand name is same, the controlling entity is same, human resources are same, it will be difficult to expect that there is full compliance on mere separate registration of a firm," the court had noted.

The court had also red-flagged global auditing firms investing in chartered accountancy firms in violation of existing foreign direct investment (FDI) policy by using a circuitous route of interest-free loans to partners.

ICAI is also of the view that these firms should adhere to advertisement guidelines, not share fees with the global company, comply with FDI rules and even local firms are allowed to operate in the home countries of these global firms as part of the so called ‘reciprocity agreements’.

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