I
do not think there is any need here to repeat the allegations being
raised against Purti Group of companies, allegedly controlled by BJP’s National
President, Mr Nitin Gadkari. A high
decibel investigation and trial by the Media is on, from which there is no easy
way to keep aloof. Since the facts that
are being disclosed by the Media are already part of public domain, through records
of Ministry of Corporate Affairs (MCA) and Mr Gadkari has chosen not to contest
these facts (unlike the previous allegations by Indian Against Corruption (IAC)
on certain land deals), no one is left with any choice but to believe these
allegations, prima facie.
However,
here I am not rushing to pass any judgement on Gadkari’s culpability or
otherwise. I continue to maintain my stand that criminal liability of any
person is to be decided by courts alone, after hearing both sides of the
story. However, without any prejudice
towards Gadkari or his companies, for the purpose of this post I would consider
these allegations are true, because I am aware that such alleged activities are
not completely alien to the Indian corporate world. May be not to the scale of being alleged
against Gadkari and Purti Group, but many of those alleged actions are only too
common to corporate bodies in India.
Having
said that, let us come to the subject of this post. I happened to read a tweet from an IAC
activist (who, incidentally, is supposed to be facing an internal Lokpal on
certain allegations of wrongdoings against himself) claiming credit for the
head of Gadkari, as a victory for their ‘fight against corruption’. What is
this victory; Gadkari losing his second term as President of BJP? Or even being
forced to resign before his first term ends?
Will that resolve all the alleged crimes of forgery, benami
transactions, misrepresentations etc? Or is the ‘fight against corruption’
limited to getting established leaders resigned from their respective posts and
scoring political victory?
I
have been maintaining that corruption is not a political, but a social and
systemic issue. If at all, Gadkari
incident only proves that corruption is not something that one gets afflicted
with, while acquiring a membership to Congress Party as some people would like
us to believe! Corruption is spread across the political spectrum, often people
from different parties forming a nexus to pursue their activities, irrespective
of political changes! So, the real fight
against corruption has to address, not just the individual leaders (that only
makes political class to go on the defensive and weaken our democracy) but also
the systemic reforms and propagation of positive social values!
Now
look at the expose itself. How is it that a bunch of journalists are able to
unearth so easily, such details that were supposedly created by the so called financial
and legal brains so as to never come out in the open? Well, answer is
simple. It is made possible by a
technological reform that MCA undertook some years back, when they established
their e-portal for all the regulatory filings and information sharing. Today, any concerned citizen can log in into
the MCA website (www.mca.gov.in) and down
load enough information about any company.
Same
was the case with e-filing of Income Tax returns. It has reduced a huge amount of corruption in
the IT department, at least for the ordinary tax payers. While corruption continues unabated to a
large extent where individual cases are taken up for assessment, some hope has
certainly been generated from the changes that occurred since the introduction of
benefits of IT (Information technology) to the IT (Income Tax) department.
Role
of Right to Information Act (RTI) is another case in point. We all know what
role RTI is playing in exposing the alleged corruptions and how bureaucrats and
politicians are becoming more careful about their acts and deeds. Right to Service Act and Citizens’ Charter
etc being introduced in various states now are also expected to take these
reforms further and enable empowering of citizens against corruption.
After
observing these developments, I can only say that corruption can be eliminated
by such systemic reforms that bring in transparency and accountability.
No
Lokpal or Police can prevent corruption that takes place between two willing
parties. At best, they can act when extortion
happens. But if the person is willingly
giving a bribe for an undue benefit (true in most cases) Lokpal or Police will
never get to play a role. If third
parties are allowed to complain, then we run the risk of every unsuccessful
person alleging corruption and challenging each and every decision.
That
brings us back to the Purti Group issue.
How so many companies could be incorporated at fraudulent or fictitious
addresses and how so much funds could flow between these companies with no
apparent economic activities? Therein
lies the real problem that needs to be tackled to prevent corruption, black
money and Benami transactions.
More
often than not, novo rich entrepreneurs would not even know the basics of
corporate strategy. It is the hired
professionals like Advocates, Chartered Accountants, and Company Secretaries
who advise them with such exotic structures for money laundering and tax evasion. So long as our focus remains on political
leaders alone, these professionals will continue to flourish unnoticed.
So
many companies have been incorporated, apparently with wrong facts. How could this be possible? What does the law
says? Section 32 (2) of the Companies
Act, 1956 provides the law as follows:
A declaration by an
advocate of the Supreme Court or of a High Court, an attorney or a pleader
entitled to appear before a High Court, or a
Secretary or a chartered accountant in whole-time practice in India who is
engaged in the formation of a company, or by a person named in the articles as
a director, manager or
secretary of the company, that all the
requirements of this Act and the rules thereunder have been complied with in
respect of registration and matters precedent and incidental thereto, shall be filed with the Registrar; and
the Registrar may accept such a
declaration as sufficient evidence of such compliance.
Why is
that the Media and investigations not focusing on the person who has certified (in
prescribed Form 1) that all the requirements of the Act have been complied
with? RoC will merely wash his hands by pointing out that the Act permits him
to accept such declaration as sufficient evidence of compliance!
Now how can we improve the situation
better? Just amend the Section by deleting the words “or by a person named
in the articles as a director, manager
or secretary of the company” and make
it compulsory for an independent professional to certify the compliance of all
laws. We know in Gadkari like cases, an illiterate driver or a cook can be
forced to become a director and sign such declaration which serves no purpose
at all in ensuring compliance. But for
an Advocate or a CA or CS, certain due diligence will be necessary before
signing and therefore, they can be made accountable for the veracity of facts
therein.
Even in the present case, I wish the
Media don’t give up with Gadkari’s head alone but go further in unearthing the
role of any professionals in these activities, whether in making the declaration
or in filing of the documents. They must also be held responsible for taking
part in fraudulent activities.
Individuals do not have any higher duty to be accountable to society;
but Professionals do have such a duty! Their respective regulatory bodies must
ensure that the professionals comply with such duties towards the public and State.
Now
look at the role of statutory auditors.
I am surprised that The Institute of Chartered Accountants have not responded
to these allegations! I wish they have taken suo moto notice of the allegations and called for an inquiry into
the role of their own brethren in the whole matter. After all, the Institute in
mandated to ‘regulate’ the profession of Chartered Accountants.
As
per the Second Schedule to the Chartered Accountants Act, 1949, inter alia the following acts and
omissions amount to a professional misconduct:
(4) Expresses
his opinion on financial statements of any business or enterprise in which he,
his firm, or a partner in his firm has a substantial interest;
(5) Fails to
disclose a material fact known to him which is not disclosed in a
financial statement, but disclosure of
which is necessary in making such financial statement where he is concerned with
that financial statement in a professional capacity;
(6) Fails to
report a material misstatement known to him to appear in a financial statement
with which he is concerned in a professional capacity;
(7) Does not
exercise due diligence, or is grossly negligent in the conduct of his
professional duties;
(8) Fails to
obtain sufficient information which is necessary for expression of an opinion
or its exceptions are sufficiently material to negate the expression of an
opinion;
There is
no doubt, if we go by the alleged facts about these companies their auditors
are likely to be guilty of one or more of the above misconducts.
Further, the Standard
on Auditing (SA) 700 (AAS 28) issued by the Institute itself demands from the statutory
auditors while issued audit certificate that, the “report should include a statement that the audit was planned and
performed to obtain reasonable assurance whether the financial statements are
free of material misstatement” and that the “report should describe the
audit as including “examining, on a test
basis, evidence to support the amounts and disclosures in financial statements”. Therefore, it is the duty of the Institute to
ensure that its Members are adhering to the basic needs of the profession while
issuing audit reports to shell companies with no apparent business other than
routing of money, to and fro!
It is pertinent to note what the
Report of the Expert Committee on Company Law has to say about the Duties and
Liabilities of the statutory auditors of a company:
29. Auditors have the general duty of discharging their
statutory functions with care and diligence. Many stakeholders would rely on
the auditor’s reports for accessing the financial picture of the company.
However, there cannot be any specific prescription of negligence keeping in
view the expectations of all the stakeholders. However, auditors are required
to carry out their work within the discipline of the legal provisions and the
standards of accounting/Accounting Standards (where notified). There is a
necessity that the work of the auditors should uphold the highest standards of
excellence and independence. Non-compliance with such standards should invite
stringent penalties. The Committee was of the view that the basic duties of the
Auditors and their liability need to be laid down in the law itself instead of
in the Rules. Quantification of penalty for Auditors may be prescribed in the
Rules (http://www.mca.gov.in/Ministry/chapter9.html).
Same
is the case for all Income Tax Officers who have subjected any of these companies
to assessment. They must be made accountable
for incompetency, if not collusion for failing to identify the nature of fund
flows in these companies.
If we have to prevent corruption
(please note, I am talking of preventing corruption and not about punishing
corrupt) we have to ensure that there is accountability and transparency across
the regulatory environment. Our policy
of externalising entire responsibility for corruption on to political leadership alone
is surely back firing and proving ineffective.
Let us also demand higher standards (or at least reasonable standards)
from those professionals who enjoy statutorily protected monopoly in their
respective practices!
