BREW YOUR TEA #12 Sunday Reflections with CA Hemant Gupta

Dear Esteemed Professional Colleague,

With the festival of Holi just round the corner first let me wish you and your loved ones a Happy Holi!!

 I pray to God for wellbeing of you and your loved ones.

 Today I wish to share my thoughts on networking of CA Firms especially in light of recent guidelines issued by ICAI for the same.

 As a working professional we have always tried to find newer opportunities, newer ways to grow practice. Out of the many ways to build a practice, networking could be more acceptable way to grow a practice.

 So what actually networking is, it’s basically a process of interacting with others to share information, resources and to develop professional and social contacts. It basically allows us to build and grow on each other's capacity.

 There are organic and inorganic model to grow practice. Organic model allows us from individual or proprietorship firm to LLP or partnership firm model for growth.

 Inorganic model offers option of merger and networking. In merger you can find already established practices and different or same locations, may be with different verticals, or just with more partners etc., you can merge your firm and then be a part of some larger setup, secondly one can always grow practice by networking informally or formally without losing one’s identity.

 There could be a multiple benefits of working in networking model from multi-location presence, to having people of varied skill set or different verticals, with the potential for exponential growth and also offering protection to small and medium firms in preserving their identity.

 You can find readymade resources with immediate scalability, with access to various geographical locations and perhaps globally as well. You don't need to have a fixed cost structure you could promote a common branding. One could have common Pool of finance, for common IT infrastructure e.g. cloud based IT capabilities etc. ultimately you could stand to gain substantially in comparison to what you are working as individual unit. All you need is to just take a leap of faith trust others and let others trust you and in the process you can achieve a lot of synergy and success.

 Though history of networks in India not much encouraging there are less than 100 networks registered with ICAI. There is lackluster response from the members for creating networks, therefore we also need to identify and find the possible solution for reasons why it is not so successful.

First and foremost reason I would say lies into interpersonal issues people usually want to be leaders but de do not want to take any responsibility for failures so if you are going to form a practice in a networking mode there has to be if not more at least two three person who take their responsibilities and work as a leader and take the network to desired result.

 Secondly I feel that there is a lack of legal sanctity or recognition to the network form of practice that has to be taken care of by ICAI, then there is issue of taxation and coordination or lack of it because being in network each and every unit of the network will consider itself if not superior at least at par with everybody so a lot of interpersonal handling would be required in managing a network.

 Lastly there is a fear of being shadowed by network, individual firm fear they may lose their individual identity. These all need to be addressed to.

 Our practice model is not very innovative and is highly dependent on auditing and taxation and compliance work. We are so dependent on empanelment work if there is no empanelment or government work a lot of practicing unit might not be able to survive. We are also extremely attached to our individual name even at the cost of possible growth. Also as soon as any client grows they do not considered the same practicing firm as competent enough to cater to the needs perhaps it's also true so they move on to bigger firms so smaller firm do not get a chance to grow with the client to whom they had supported wholeheartedly throughout their journey.

 Then there are technological advancements which is actually replacing human intervention in various works.  The more complex the transaction the lesser the need of human intervention is felt. There might be a situation in future where you might not even require an accountant to record a transaction or an auditor to audit the transaction. It might be done with help of say block chain technology or maybe by way of some artificial intelligence giving more impersonal and accurate results.

 Further from the perspective of public sector enterprises there is a lot of privatization and mergers of public sector banks happening thereby a lot of opportunities are being lost and more recently you also know that tax audit limit have also been generally increased. Sister professional bodies have been allotted responsibility or authority to conduct internal audit perhaps some other profession opportunity might also get out to the hand of a chartered accountants. Manpower issues are also there which make it very difficult to retain good resources, to name few of our problems.

 So what could be the possible solutions one of many solutions suggested by our parent institution ICAI, to form LLP for corporate type practice, where it is easier in comparison to partnership to add or remove partners with much larger partner base. There is also a option of merger with option to demerged within a period of 5 years ICAI also is under completion of modalities to allow establishment of multidisciplinary firm wherein a CA, CS , CMA, Architect, Engineer and various professional belonging to different to area of expertise can work together under the same name and roof.

 Then there is the option of networking which is being promoted by ICAI to build the capacity of small chartered accountant form so that we could have access to a larger area. ICAI would also be making endeavors to secure recognition to new form of network so that a lot of work could be allotted in the name of network on the strength of network so that firm in network actually see some real and important work coming their way.

 ICAI come up with new networking guidelines in addition to strengthening the existing network model ICAI has come with new model of networking which is called alliance and networking with lead firm model. There have also been some changes to existing networking models all of these are effective from 9 February 2021

 Alliance or networking is basically a larger structure of a group of Indians CA firms/entities coming together for pooling of resources and using their combined strength with uniform policy technologies and to showcase themselves as a big unit.

 It is to be noted that there is no common ownership there is no common control or common management in alliance mode but same is there in network mode. Attributes of network would be corporation sharing knowledge, common quality control policies, geographical presence common ownership control and management combined with written agreement demonstrating intention to corporate and create network.

 In Lead firm model but they have same parameters combined with one lead firm acting on behalf of all the members so that responsibility on leadership is fixed

 One point is to be emphasized that in case of entities having majority of common partner they can join one network only. One more thing is to be noted if any unregistered network is there it would not be given any recognition but all the limitation or rules and regulation will be applicable to it.

 It is also to be noted that what does entity means entity means a sole proprietorship firm, partnership firm, LLP but does not include an individual person so it's very clear you need to be minimum of sole proprietorship firm to enter into any networking model.

 So before you fall in love with prospects of networking model which involves less commitment more freedom and possibly the word you need to look before you jump at this opportunity you need to complete your due diligence have a detailed knowledge about other firms in an alliance/ network. Also know that you cannot be part of more than one alliance/network so there is complete monogamy.

 For naming network it should not resemble any existing network name. You can make the acronym from the existing firms name only and firms can publish that they are independent member of so and so alliance/network.

 The legal status of network as per ICAI guideline would that is of AOP and accordingly the taxation provisions shall apply. Network would be able to open a bank account and have a PAN, and common balance sheet, website etc. but you also need to be willing to pay tax as per taxation provisions and be willing to contribute for common cause.

 It is important to have internal bye laws the illustrative areas to cover are like who will be the managing committee, who will be the person responsible for administration of the network, how much membership is be paid by each practicing unit of the network for common expenses of the network, development of common software, training material data bases etc.

 Once decide to form a network, you need to apply for name availability of the network, which will be put on hold upon approval for 3 months then you need to apply for registration of a network. Post registration any changes to network are to be registered within 30 days the change or in case of delay it will be counted as effective from the date of application.

 From ethical compliance prospective globally networks are not given any work but their combine strength is reckoned and given due respect and work is allocated based on their combined strength, therefore some ethical limitations are also attached to them e.g. associate firms will not accept the internal audit or bookkeeping other assignments etc. if some other network or alliance firm is already having statutory audit. Similarly rotation of auditor within the same network cannot be accepted. Alliance/Network will perform only non-attest functions however if no firm is performing CSA audit of any public sector bank then in that case various other firms in network can take branch audit work or concurrent audit of that public sector bank, lastly provision of section 144 of companies act 2013 will be applicable to the network in relation rendering of other services in case of a statutory audit assignments.

 No doubt its tough road ahead in making any network successful and commonly recognized but one can take solace from the fact the its been done all over the world couple with the fact the our ICAI is recognizing this and striving to make it successful.  All we need to do is have common objective i.e. growth in practice by finding newer avenues because you like it or not practice as we all know is changing by the day. It’s not what it was 20 years back and it will not certainly not be what it is 10 years from now.

 So, Either Lead or Follow or Simply get out of the way because change is coming and it’s real.

 Happy Holi!!

  Thank you for Reading!!