The ministry of company affairs has begun a comprehensive review of the legal provisions and regulations governing chartered accountants following the Satyam [Get Quote] accounting fraud that covers, among other issues, the operation of surrogate firms in India by large foreign audit firms.

Sources close to the development said a notification to this effect will be released soon. The Chartered Accountant Act, 1949, and the Chartered Accountant Regulations, 1988, form the basis for the profession in India.

On the issue of surrogate audit firms established by Indian chartered accountants that tie up with foreign firms, a source said there were 'numerous anomalies.'

One of them is that the Indian firm bags an audit contract but the partner actually auditing the Indian company often belongs to the foreign firm, violating the Companies Act, 1956, and the Contract Act, 1872.

He added that Indian arms of foreign firms have taken advantage of their tie-ups to make it a rule that audits must be conducted by their foreign partners for Indian companies approaching the overseas markets to raise funds or for mergers and acquisitions. No such rule exists, the source said, although the practice is common. 

"We are, therefore, screening the partnership agreements of all these firms to analyse the legal basis on which the foreign firms audit Indian companies," the source added.

Much of this will change, however, once the Limited Liability Partnership Act, 2008, which enables foreign chartered accounting firms to set up audit practices in India, is notified. The Bill was passed by Parliament on December 12, 2008, but is yet to be notified. 

Second, the rule of capping the number of audits per partner per firm may also be scrapped or the limit raised to allow more freedom and competition. The rules currently allow 30 audits per partner per firm, but the thinking in the government is that this rule tends to play down merit, since it means audit firms get business irrespective of their track record.

Also under review is the practice of rotating chartered accountants by companies in the interest of introducing more accountability and transparency in the profession. Currently an option, regulators think it makes companies stick to the same auditor for years, which may promote more accounting frauds.

The review is a joint exercise by the ministry and the industry and is based on feedback from various chartered accountant forums.