Introduction :
Every business requires multifarious professional services and it is common knowledge that a business entity invariably approaches multiple agencies for different services, for which they are qualified or considered proficient. It is a rarity in reality that a single agency is competent to render all services under one roof. This is the case with a chartered accountancy firm too. One of the reasons for such a situation prevalent has been the ethical barrier imposed under the Chartered Accountants Act, 1949. Now, the scenario has changed, enabling the formation of Multidisciplinary Firm (MDF), thanks to the Chartered Accountants Amendment Act, 2006. This article is intended to analyse the objective behind the promotion of multi-disciplinary firms and the consequences thereof.
Ethical barrier :
The First Schedule of the Chartered Accountants Act, 1949, under item (2) of Part I considers that paying or allowing any share, commission or brokerage in the fees or profits to any person other than a member of the ICAI or a partner or a retired partner or the legal representative of a deceased partner, to be a professional misconduct. Item (3) treats accepting any part of the profits of the professional work of a lawyer, auctioneer, broker or other agent who is not a member of ICAI, as professional misconduct. Further, item (4) prohibits entering into partnership with any person other than a Chartered Accountant in practice, unless otherwise recognised by the Central Government or the Council. Item (5) considers as professional misconduct the securing of any professional work through the services of a person not qualified to be his partner. The Chartered Accountants Amendment Act, 2006 has modified the position to enable members of ICAI not only to transact with a non-member, but also to enter into partnership and share profits.
As a fallout of the change in the law governing the profession, the Council of ICAI also deliberated on the need to recognise members of other professional bodies and recommended to the Government to amend the Chartered Accountants Regulations, 1988 to recognise members of the following professional bodies for purposes of items (2), (3) and (5) of Part I of the First Schedule to the Act :
- The Institute of Company Secretaries of India;
- The Institute of Cost & Works Accountants of India;
- Bar Council of India;
- The Indian Institute of Architects; and
- The Institute of Actuaries of India.
In addition thereto, the Council has also recommended for the purposes of items (2), (3) and (5) of Part I of the First Schedule to the Act, persons qualified in India as :
(i) Bachelor in Engineering from a university established by law or an institution recognised by law;
(ii) Bachelor in Technology from a university established by law or an institution recognised by law; and
(iii) Master in Business Administration from universities established by law or technical institutions recognised by AICTE.
The Council has recommended, in the context of MDF, members of the following professional bodies for the purposes of item (4) of Part I of the First Schedule to the Act :
(a) Company Secretary, member, The Institute of Company Secretaries of India, established under the Company Secretaries Act, 1980;
(b) Cost Accountant, member, The Institute of Cost and Works Accountants of India established under the Cost and Works Accountants Act, 1959;
(c) Advocate, member, Bar Council of India established under the Advocates Act, 1961;
(d) Engineer, member, The Institute of Engineers, or Engineering from a university established by law or an institution recognised by law;
(e) Architect, member, The Indian Institute of Architects established under the Architects Act, 1972; and
(f) Actuary, member, The Institute of Actuaries of India, established under the Actuaries Act, 2006.
It is clear that the objective, as far as MDF is concerned, is to allow only members of such professional bodies which have been constituted under a statute, to be eligible to become partners. As and when the recommendation of the Council is approved by the Government and notified, Chartered Accountants will be in a position to enter into partnerships with Company Secretaries, Cost Accountants, Engineers, Architects, Advocates and Actuaries. Thus, the ethical barrier hitherto existing will get relaxed to that extent. Similar relaxation may be granted later by amendment to Regulations as and when the Council considers members of some other discipline as eligible for admission into the MDF. Further, as and when ICAI enters into Mutual Recognition Agreement (MRA) with any professional body or institution situated outside India, by virtue of S. 29(2) of the Chartered Accountants Act, 1949, members of ICAI will be in a position to enter into partnership even with members of such bodies/institutions.
Corporate Form v. MDF :
Generally, a chartered accountancy firm requires the services of other professionals more in respect of management consultancy services than in core areas such as auditing and assurance services. A chartered accountancy firm so far had the following two options to associate with the members of other professional bodies or professionals of other disciplines :
(i) By engaging such persons as employees or as retainers; or
(ii) By floating a Special Purpose Vehicle (SPV) in the form of a company or a firm.
Although the first option was commonly practised and found feasible, it did not facilitate wholesome involvement of other professionals, as they had to operate either as subordinates or as outsiders to the organisation. In the second option, when a company was formed as an SPV, a Chartered Accountant in practice could be a promoter and a Director Simplicitor. However, if he had to hold the office of Managing Director or whole-time Director or Manager, he had to obtain special permission of the Council, provided he and his relatives did not hold substantial interest in such company. If substantial interest was held, then such position could not be occupied unless he surrendered the Certificate of Practice. This situation was modified by the Council with effect from 1-10-2006, subject to certain conditions.
As per the Council decision, members in practice are allowed to hold the office of Managing Director, Whole-time Director or Manager of a company, provided the company is exclusively rendering management consultancy and other services permitted in pursuance of S. 2(2)(iv) of the Chartered Accountants Act, 1949. By an earlier decision, the Council had barred members in employment holding certificate of practice from carrying on attest function. They can render consultancy services and are regarded as in part-time practice. Even this restriction does not apply to CAs governed by the later decision. This later decision which allows members to hold positions in management consultancy companies regards such members as being in full-time practice and therefore they can continue to do attest function besides training articled assistants as per the eligible norms. The Guidelines on Corporate Consultancy practice were published in October 2006 (page 629) issue of "The Chartered Accountant".
On the other hand, if a partnership firm was constituted to be the SPV, a Chartered Accountant could not be a partner with non-members and he had to secure the services of non-members only as employees or retainers even in that firm. An MDF is intended to provide a better mechanism to get over these practical difficulties, so that a Chartered Accountant in practice can enter into partnership with professionals in other disciplines. Thus, the choice emerges between corporate practice or an MDF in consultancy management services. Simplicity in terms of procedural requirements may attract small and medium practitioners (SMPs) to opt for MDF than for a corporate status. Again, the volume of funds required and methodology preferred for pooling of monetary resources may be deciding factors to choose between a corporate entity and an MDF. Yet another crucial factor to be borne in mind is that an MDF can engage itself in both core and non-core areas, whereas in corporate form, exclusive areas like statutory auditing cannot be undertaken. S. 25 of the Chartered Accountants Act, 1949, makes it clear that no company shall practise as Chartered Accountants.
Capacity building :
MDF is intended to build the capacity of any CA firm in terms of ability to render multifarious services. Many clients need services such as accounting, auditing and assurance, secretarial, legal, systems controls and audit, valuation, risk assessment and management, so on and so forth. The role of other professionals cannot be undermined in many of these areas. If experts of many disciplines come together as partners by establishing an MDF, the client need not run from pillar to post to get a wide range of services. All the needs of a client organisation in promoting and establishing an entity; getting licence and launching a venture or project; mobilising funds in the market across the globe; restructuring, mergers, acquisitions and amalgamations; business process re-engineering and the task of complying with the plethora of requirements prescribed under various statutes can all be effectively handled under one umbrella by the MDF.
Sharing the fruits of labour provides a sense of belonging and incentive to the professionals to come together and establish an MDF. A person’s commitment in shouldering the responsibilities and sharing the obligation in a firm as one of the partners is altogether on a different pedestal than when he is associated merely as an employee or as a consultant. This extra bondage ensured in an MDF for the effective functioning of the professional firm provides much desired impetus for formation of MDF. All the service providers being governed by well-established norms of a single firm; uniform systems, procedures and controls in rendering services; standardised billing pattern and client relationship facilitates smooth understanding between the professional firm and the clientele. MDF is also in a better position to render advice or opinion to the client on a continuous basis, as the firm is in the know of all facets of the activities of the client’s business. Transfer of data and information about the client from one division to another division within the same firm as inputs for rendering further service is much easier and faster than obtaining the same from another firm or agency. In this context too, the client is better placed in engaging an MDF in contrast to a single-discipline firm to save time and avail composite services in an expeditious manner.
Specialisation is the order of the day. When professionals who specialise in each spectrum, but belonging to different disciplines are able to align through MDF status, the firm gets empowered to undertake work of greater magnitude and challenges. Innovation and immense value addition engraved in the services could enhance the image and reputation of the MDF. Expansion and growth prospects for an MDF appear to be comparatively bright, as the proficiency and skills among the partners are not competitive, but are complementary in nature. Coexistence of experts drawn from different professions is a prelude to greater capacity building and this factor could secure a stronger bondage in an MDF. Once an MDF is able to establish itself successfully in a particular geographical location, replicating the same in other places and thereby spreading the presence of the firm in different parts of the country and in different countries should not be a difficult proposition.
Limited liability partnership and MDF :
In MDF, the nature of work that flows could be so divergent that all partners may not be involved in the execution of each assignment. Some partners may be always unconnected with certain types of work and this may be the case with all the partners with reference to some work or the other. In such a situation, the risk factor involved needs to be evaluated. It is possible that due to the negligence of some partner(s) in certain type of work, the civil liability on the firm in the form of damages or compensation could be heavy. This aspect may also enhance the cost of professional indemnity policy with reference to an MDF. This risk could assume alarming dimension, as at present, the liability of a firm in partnership law is unlimited and the partners are personally, jointly and severally liable in respect of the obligations of the firm. This aspect puts a corporate form of practice in consultancy area in an advantageous situation than an MDF as on date. However, this demerit of an MDF will vanish if the liability of the partnership firm and partners could be limited — hence the LLP.
It is in this perspective that the Government’s initiative to enact the Limited Liability Partnership (LLP) Law is a welcome development. An MDF in the form of an LLP would be most suited as the liability of the firm, and in turn, the liability of partners would stand defined and restricted. Global experience also indicates that LLP is the most suited vehicle for an MDF. It may not be out of place to mention that the Bill on LLP introduced in the Parliament in 2006 is expected to fructify into a legislation during the current year.
Challenges :
MDF as a concept can pose many issues and challenges in the course of implementation, which need to be carefully addressed and solutions to be spelt out. For instance, name and description of the firm could be an issue. Professional bodies whose members enter into MDF need to address this issue harmoniously. Again, if any professional body has any restriction on its member entering into partnership with another professional, the same needs to be removed to enable easy creation of MDF. It is heartening to note that amendments have already been made in the Acts governing the professions of Company Secretary and Cost Accountant, enabling them to be part of MDF.
An MDF involving Chartered Accountants as partners should take care to comply with the ethical code of conduct applicable to a Chartered Accountant firm. For instance, if an MDF accepts audit assignment of a client concern, it cannot undertake accounting work for that client and vice versa. Similarly, both internal audit and statutory audit for the same client should not be done by an MDF.
The most important issue could be in exercising the jurisdiction with reference to disciplinary action and also in terms of fixing up responsibility with reference to a particular professional among the partners of an MDF. Unlike the legal position in some countries, in India the disciplinary action of ICAI is always with reference to an individual member and not against the firm of which he is a partner. Where the responsibility is not identifiable with a particular partner, then the proceeding can encompass all partners of the firm. In any case, it is not against the firm. In MDF, the professional misconduct or other misconduct of each partner will have to be tried by the corresponding professional body of which he is a member and consequences should follow accordingly. There could be a problem when there is passing of the buck from one professional to another professional of different discipline and the nature of work is such that both could have done it. Similar issues may occur in the context of MDF in the initial stages of its evolution. However, if the philosophy is rightly understood, every such problem encountered can be comprehended with appropriate clarification. Norms and principles are expected to be laid down in due course by the Council of the ICAI for clarity in operation of MDF and for resolving conflicts that may arise in practical situations.
Conclusion :
The globalised scenario is posing a threat and at the same time presenting attractive opportunities to Indian Accounting firms. It is inevitable for Indian firms to get empowered with adequate manpower, skill sets, data base and good infrastructure. A firm should develop and adopt robust systems, procedures and controls to deliver quality services. Upgradation of knowledge and training of human resources should be on-going endeavours. A firm needs to expand by mergers or otherwise and focus on growth by bringing wider spectrum of services within the ambit of its functioning. All these can be better accomplished through the status of an MDF.
One should not lose sight of the possibility that a group of Chartered Accountants may join hands to float one firm to carry on practice only in the field exclusively earmarked for CAs, and form another firm in the nature of an MDF to execute all other services that come in their way. The same thing can be done by an existing chartered accountancy firm which can confine its role to exclusive core areas of practice and start an SPV in the form of an MDF to render all other services. Needless to mention that the status of MDF and the legislation on LLP are culminating into reality at the appropriate time when India is emerging as the most sought-after global destination in the service sector.
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