Committee for Capacity Building of CA Firms & Small and Medium Practitioners of the Institute of Chartered Accountants of India (“ICAI”) has come up with ‘Revised Guidelines of Network’ (the “Guidelines”) on 31 August 2011, which, if approved by the Council, proposes to replace the existing “Rules of Network and Merger-Demerger amongst the Firms registered with the Institute of Chartered Accountants of India” which lays down the guidelines for network amongst the Chartered Accountant firms registered with the ICAI.
According to the definition provided in the proposed Guidelines, a “Firm” means a sole Practitioner / proprietor, partnership or any such entity of professional accountants as may be permitted by law.
The proposed Guidelines also provide that, a “Network” relates to a larger structure that is aimed at co-operation; and that is clearly aimed at profit or cost sharing or shares common ownership, control or management, common quality control policies and procedures, common business strategy, the use of a common brand name, or a significant part of professional resources.
Such a network can be in the form of a mutual entity, partnership firm, limited liability partnership or a company, provided that the various rules and regulations with respect to each of them are being complied.
Appendix – I of the proposed Guidelines provide for various situations wherein an arrangement/association of Chartered Accountant firms is such that it will be considered to be a Network coming under the purview of these guidelines. These are as follows:
- If a larger structure formed by a set of firms and other entities is such that it is aimed at co-operation and the firms share a common brand name, a common system of quality control, or significant professional resources and consequently it will be deemed to be a network.
- If by facts and circumstances, a third party would conclude that entities are associated in such a way that it forms a network then it will be deemed to be a network. This judgment shall be applied consistently throughout the network.
- Where the larger structure is aimed at co-operation and it is clearly aimed at profit or cost sharing among the entities within the structure, it is deemed to be a network. However, the sharing of immaterial costs does not in itself create a network.
- If the structure is aimed at co-operation and if the entities within themselves share common ownership, control and management then it is deemed to be a network. This can be through contract.
- If the larger structure is aimed at co-operation and the entities within the structure share a common business strategy, it is deemed to be a network. Sharing a common business strategy involves an agreement by the entities to achieve common strategic objectives.
- Where the larger structure is aimed at co-operation and the entities within the structure share the use of a common brand name, it is deemed to be a network. A common brand name includes common initials or a common name.
- Where the larger structure is aimed at co-operation and the entities within the structure share a significant part of professional resources, it is deemed to be a network. Professional resources include:
- Common systems that enable firms to exchange information such as client data, billing and time records;
- Partners and staff;
- Technical departments that consult on technical or industry specific issues, transactions or events for assurance engagements;
- Audit methodology or audit manuals; and
- Training courses and facilities.
The determination of whether the professional resources shared are significant shall be made based on the relevant facts and circumstances. Hence, if the shared resources involve the exchange of people or information, such as where staff are drawn from a shared pool, or a common technical department is created within the larger structure to provide participating firms with technical advice that the firms are required to follow, a reasonable and informed third party is more likely to conclude that the shared resources are significant.
Therefore, whether a larger structure created to enhance the ability of the firms to provide professional services can be called a network depends on the particular facts and circumstances and does not depend on whether the firms and entities are legally separate and distinct.
As per the proposed Guidelines, a firm is allowed to join only one network and if the firms have common partners, then they are allowed to join only one Network.
As far as the name of the network is concerned, prior approval of the ICAI is required. A distinct name of a network does not seem to be mandatory as the proposed Guidelines states that a network ‘may’ have a distinct name. The existing “Rules of Network and Merger-Demerger amongst the Firms registered with the Institute of Chartered Accountants of India” also makes it optional for a network to have a distinct name. The proposed Guidelines also provide that to distinguish a “Network” from a “firm” of Chartered Accountants, the words “& Affiliates” shall be used after the name of the network.
Once the Network is registered with the ICAI, it has to comply with all applicable ethical requirements prescribed by the Institute from time to time.