Do you believe it was appropriate for the major international accounting firms to establish networks of "surrogate" firms in India for the purpose of gaining wider access to the professional services markets in that country? Was that decision "ethical"? Defend your answers.

The highly publicized release of the CAAC's White Paper report in July 2003 and the ensuing criticism of that report by a wide range of parties placed tremendous pressure on the ICAI. Both supporters and critics of the report expected the ICAI to respond quickly and decisively to the report's key findings and recommendations. But that did not happen.

At the time the White Paper report was released, the ICAI was mired in two controversies. First, the Indian business press had reported that the wife of the ICAI president was a part-owner of a large private business that provided "coaching" courses for the series of examinations that had to be successfully completed to earn the CA designation within India. The press questioned whether the CA candidates enrolled in that business's coaching courses received an unfair advantage over other candidates. To quell that controversy, the ICAI purchased newspaper advertisements insisting that the integrity of the CA examination process was not being compromised.

The second controversy facing the ICAI in the summer of 2003 involved what had become known as "India's Enron." India's largest business conglomerate is the Tata Group, which consists of approximately two dozen public companies and 80 privately owned businesses. Collectively, the Tata companies account for nearly 3 percent of India's gross domestic product and employ several hundred thousand Indian citizens. India's largest accounting firm, A. F. Ferguson & Co. (AFF), audits several of the largest Tata companies.

In 2001, the Tata Group hired AFF to complete an investigation of an alleged accounting and financial reporting fraud within Tata Finance Limited, a Tata company that was not audited by AFF. In 2002, AFF released a 900 page report documenting the results of its investigation of the Tata Finance fraud. That report shocked the Tata Group, the Indian business press, and the general public by implicating several of Tata's top executives, including the chairman of the Tata Group, Ratan Tata, in the fraud. Ratan Tata purchased full-page advertisements in major Indian newspapers insisting that the report was inaccurate. AFF eventually withdrew the report and dismissed the three partners responsible for writing it.

One of those partners was Y. M. Kale, who was among the most prominent members of the Indian accounting profession. Kale served on the International Accounting Standards Board, was a former president of the ICAI, and reportedly was in line to become AFF's next managing partner.

The business press, leaders of the accounting profession, and various other parties demanded that the ICAI investigate the Tata scandal and the role of AFF in that scandal. After a brief investigation, the ICAI failed to file charges against anyone involved in the matter, which renewed allegations that the ICAI was a lax and ineffective watchdog agency for India's accounting profession.

The ICAI finally responded to the CAAC White Paper report in late 2004. The ICAI identified several proposals to strengthen the competitive position of Indian accounting firms that were not affiliated with MAFs. Among these proposals was a recommendation encouraging such firms to create cooperative networks that would allow them to pool their manpower, technological, and financial resources. The ICAI also announced that it planned to increase from 20 to 50 the maximum number of partners that accounting firms could have and that it would allow accounting firms to establish consulting divisions. Over the past decade, the so-called surrogate firms had established de facto consulting divisions as a result of their affiliations with MAFs. The ICAI's new policy meant that "nonaffiliated" firms would have an opportunity to participate in the booming business consulting market within India.

A major problem that nonaffiliated firms had faced during the 1990s was attracting qualified professionals. India's surging economy had resulted in a large increase in the demand for accounting and accounting-related services;

however, there had not been a parallel increase in the number of CAs within India. In 2004, there were only 120,000 CAs in India, meaning that on a per capita basis India had considerably fewer professional accountants than any other major country, with the exception of Japan. Making matters worse for nonaffiliated firms was a large increase in the hiring of CAs by surrogate firms during the 1990s. Because the surrogate firms offered considerably higher salaries than other Indian firms, the nonaffiliated firms found it increasingly difficult to hire sufficient CAs to staff their professional engagements. To mitigate this problem, the ICAI shortened the minimum time required to obtain a CA license from nearly five and-a-half years to approximately four years.

Supporters of the CAAC's more radical proposals were disappointed by the ICAI's decision not to pursue the imposition of sanctions or other operating constraints on the MAFs or their surrogate firms. The ICAI did report that it would ask other Indian regulatory agencies to review MAFs' operations in India to ensure that those firms were not violating the terms of their business licenses or other relevant federal rules or regulations. In responding to the allegation that MAFs were indirectly providing audit and attestation services in India, the ICAI reported it had found no direct evidence supporting that allegation but would continue to investigate that possibility.

The most important policy initiative the ICAI pursued as a result of the CAAC White Paper report was the seeking of reciprocity agreements with regulatory agencies overseeing the accounting professions of other countries. The ICAI's president noted that "while global [accounting] firms may be keen on becoming Indian, we at the ICAI are keen on making Indian firms global."³² Reciprocity agreements with foreign countries that are signed by the ICAI would allow Indian CAs to be recognized as qualified professional accountants in those countries. For example, a reciprocity agreement with the United States would permit Indian CAs to practice public accounting in the United States-and U.S. CPAs to practice in India.

The ICAI's pursuit of reciprocity agreements was generally met with a lukewarm response by the relevant regulatory agencies of major developed countries. For decades, India had such a reciprocity agreement with Great Britain.

However, Great Britain unilaterally canceled that agreement in the early 1990s, a decision that surprised and offended the ICAI. The United States has a reciprocity agreement that allows professionally registered accountants in certain countries to practice in the United States after successfully passing the IQEX-International Uniform CPA Qualification-examination administered by the NASBA. However, presently, the NASBA only allows certain professionally registered accountants from Australia, Canada, Hong Kong, Ireland, Mexico, and New Zealand to sit for the IQEX examination.

A major reason that the ICAI decided to pursue reciprocity agreements with other nations was the large outsourcing industry for accounting services that quickly developed within India following the turn of the century. Thanks to the Internet, thousands of small Indian accounting firms found a new market for their services in other countries, in particular the United States. By 2006, an estimated 360,000 individual tax returns for U.S. citizens were being prepared by Indian accounting firms, a number that was expected to grow into the millions, if not tens of millions, in the following years.³³ Indian accounting firms were also providing a large amount of rudimentary accounting services such as "write-up" work or bookkeeping for small U.S. businesses. U.S. accounting firms were outsourcing such work to India because Indian firms could perform that work much more cheaply. To make Indian accountants "globally competitive" and, in particular, better prepared to address accounting issues faced by their U.S. "clients," the ICAI added the study of U.S. generally accepted accounting principles (GAAP) to the required curriculum for the CA licensing program in 2006.³⁴

Ironically, the sudden growth in the outsourcing of accounting and taxation services to India caused the AICPA to consider taking steps to protect the U.S. market for such services from Indian accounting firms. The AICPA was also troubled by the fact that U.S.-based accounting firms could not always ensure that outsourced services were being performed in compliance with the standards of the U.S. accounting profession. Many parties within the U.S. profession insisted that, at a minimum, U.S. accounting firms had an ethical responsibility to notify their clients when they were outsourcing the services for those clients to accounting firms in foreign countries. An article in The CPA Journal succinctly summarized this controversy.

Clearly, firms that outsource the preparation of income tax returns are likely to achieve significant cost savings. But at what cost? The profession does not need more scandals, and one must wonder why many CPA firms have an unspoken rule that the client does not need to know about outsourcing. Deep down, we know taxpayers entrusting their return with a CPA are likely to respond negatively if their tax returns are prepared in India without their knowledge or consent.³⁵