Jail up to 10 years and fines up to three times the scam amount await chartered accountants and audit firms found guilty in corporate frauds. Audit firms, including the global Big 4 - Pricewaterhouse, KPMG, Deloitte and Ernst & Young - for the first time face punitive action, closure of business and stiff penalties for financial frauds as the government proposes a stricter regime to check scams and irregularities.

Mindful of the multi-crore Satyam scam and other corporate frauds, the Companies Bill 2011, tabled in the Lok Sabha last week, has proposed to give powers to the National Company Law Tribunal to take stern action against erring audit firms. A firm found guilty by the Tribunal will be ineligible for audit assignment of "any company" for a period of five years. The action includes stiff penalties, mandatorily running higher than the amount of fraud committed.

The Companies Bill proposes that the fine "shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved." Fraud, the bill says, includes "any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss".

This is the first time that the government has recommended direct action against audit firms. So far, action was possible only against errant auditors, and firms were spared. The government appears to be paying heed to demands made in various quarters to punish firms whose auditors are involved in financial frauds regularly and where there appears to be a case of systemic failure.

The Bill says that apart from audit partners, the civil and criminal liability for a fraud also extends to the audit firm. This will happen in case it is proved that the partner or partners of the audit firm "acted in a fraudulent manner or abetted or colluded" in any fraud. So, in a fraud of, say Rs 5,000 crore, an audit firm, if guilty, could face a liability of up to Rs 15,000 crore, which is much more than what most of them have.

What's more, the government has also proposed to take away a part of the powers hitherto enjoyed by the Institute of Chartered Accountants of India (ICAI). So far, ICAI decided on all disciplinary matters related to auditors. The Bill also imposes higher jail term for offenders. "... any person who is found to be guilty of fraud, shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to 10 years."

Importantly, the Bill stipulates a minimum imprisonment of three years where the fraud involves public interest.

Harinderjit Singh, Partner at Pricewaterhouse and a former council member of ICAI, said the proposals present a "very unjustified situation" for the auditors. "They have come down heavily on the audit profession as if the auditors are responsible for everything that is going on in a company."

G Ramaswamy, president of ICAI, however, welcomed the proposals. "The move to punish the audit firms is welcome and something we have been asking for. However, the power to take action should be given to the ICAI and not to the NCLT, as proposed," Ramaswamy said.

Sunil Talati, past president of ICAI, said the proposals were well directed and would have far-reaching effect on the auditing profession and the way companies function. (Times of India)