One of the biggest reasons why Indian Chartered Accountant firms
have remained small-sized is some of the antiquated laws in our
country that have shackled our profession and growth. Next time you
are watching a cricket match being played in South Africa or
England, look out carefully. You would see signboards along the
boundary advertising the names of Price Waterhouse and other big
audit firms. The prohibition against advertising has its advantages
in that it prevents big firms from hogging the limelight at the
expense of small firms. But in these days of globalisation and MNC
culture, we are up against competitors who are not bound by our
laws. India and the rest of the world have also committed themselves
to opening up the audit/legal and professional sectors. So the
disadvantage is that while the competitor enters India with a known
reputation, we have to enter other countries as unknown entities.
Yet another cause of worry for our small size is the number of
partners in our firms. A firm with 6 to 8 partners is considered a
big firm here; big enough to do the central statutory audits of
nationalised banks. At the international level, such firms would be
regarded as non-entities. The partnership law itself till recently
restricted the maximum number of partners in a firm to 20. The long
overdue Bill for Limited Liability Partnership has been introduced
in the Parliament during the fag end of 2006. I am not aware as to
at what stage the passing of the Bill is in. Assuming that it does
get passed and becomes a law, then it would open an exciting chapter
for all of us.
The LLP Act proposes to create a new legal entity, which seeks to
combine the advantages of both partnership firms and private limited
companies. The registration of the LLP is similar to that of
incorporating a company. Section 3 provides that a LLP will be a
body corporate distinct from its partners with perpetual succession.
A partnership Agreement is required to be entered into which would
be registered. This document may contain rules for admission of
other partners and their cessation. The LLP Act doe not provide for
any maximum number of partners that the firm may have. A Designated
Partner has to be nominated by each LLP under section 8 who will be
similar to a managing director of company. Under Section 5, every
partner is also required to obtain a PIN like the DIN.
Like any new law, this too would have its share of teething problems
and I hope that the powers that be that are behind this law would
also interact with other agencies and departments and reduce
avoidable confusions beforehand. In particular I would like to see
the following:
Under the Companies' Act
The first amendment required is of course in the Companies' Act and
other legislations that provide for the appointment, qualifications
and disqualifications of auditors. Presently the Companies' Act
disqualifies a body corporate being appointed as an auditor of a
company. Obviously this disqualification has to be removed since
LLP's under the proposed legislation are to be regarded as bodies
corporate.
Under the Income Tax Act
Section 2(31) will have to be amended to introduce a new class
of `persons' so as to include the LLPs too. This is required since
Section 2(23) provides now that the term `Partnership' would have
the same meaning assigned to it under the Indian Partnership Act,
1932, whereas Section 4 of the LLP Act, specifically provides that
the said Act will not apply to firms registered under the LLP Act.
The next important thing that is to be considered is allowing the
remuneration paid to partners of a LLP as business expenditure. It
is sincerely hoped that the I-T Act will not be amended to introduce
some retrograde provisions like limiting the amount of salary and
interest paid to partners, as it is presently found in Section 40
(b). Even now the limit is so ridiculously low that a CA firm with 4
partners and having a profit of 10 lakhs can pay a maximum of Rs.
470000 to all of them put together, that is less than Rs. 10000 per
month per partner. We might as well apply for a Below Poverty Line
tag. This kind of archaic provisions would only defeat the
objectives of the LLP law, since the idea is to have larger firms.
The very idea of having a large firm in LLP form is to attract the
best of talent under one roof where the majority of the people will
not only have the incentive to work for the growth of the firm but
will also be assured of a salary as per market rates with no fear of
liability.
By the ICAI
The Institute has done a good job so far in managing the profession,
but I would like to see it take more of a regulatory role for
itself. While it should continue to assist the authorities in
maintaining the panels for Bank and government audits, the remaining
job of developing the profession can be left to the professional.
The ICAI can start a process a rating the firms on the basis of
their partner and staff strength, years of professional standing,
the peer review grades obtained etc and make these ratings known
publicly. Serious efforts should be made to hasten the process of
muti-disciplinary practice and the CA firms should be allowed to
take as partners, professionals from other fields such as advocates,
company secretaries, software engineers, MBAs etc. The ICAI can play
a crucial role in regulating the admission of non-CA partners into
the audit firm by fixing a maximum percentage of such partners who
may be admitted, their minimum educational qualifications, the
desired professionals etc. Advertising to a reasonable extent may
also be permitted with the prior approval of a special cell of ICAI,
which should be engaged in vetting the advertising material.
From the Members
As practising members, we have to first of all grow out of the
mentality of looking at every business model from the taxation
angle. We have to just accept tax as an unavoidable expenditure and
look at the post tax profits as the real yardstick for evaluating a
model. In a large CA firm in LLP form, obviously every partner
cannot manage the affairs of the firm and there will be junior and
senior partners. As practitioners, we have to be much more organized
and be prepared to handle all matters as a group. This means that as
the CA firm grows bigger, not only different professionals would be
accommodated; the individual CA himself would tend to become more
and more specialized in a small area of practice. This would perhaps
result in a kind of loss of identity in that, your firm would not be
identified with only your name anymore, but one should not worry
about these things. The days when the CA unlocks the door of his
office, answers the phone calls, plans the audits, attends the
income tax office and signs the salary cheques and does everything
else himself are clearly numbered and those who don't want to accept
this change are in the danger of losing their practice.
The trick is to identify potential allies and partners and plan for
mergers on an all India basis. Initially firms operating in the same
state can do it and then firms across the regions can merge. With at
least one year to go before the LLPs start becoming visible, we can
begin planning seriously. With proper planning, the chances of
seeing Indian CA firms with 60 to 100 partners and having offices
all over India and maybe the world too appear bright in the near
future.
Balu
CAclubindia
