The three-member committee has been asked to suggest a revamped regulatory mechanism for big auditing firms within two months.
The order came in a public interest petition alleging that failures and malpractices within the auditing community has led to losses to investors and the public exchequer, while also raising national security concerns.
The Supreme Court broadly agreed with the PIL that was argued by Prashant Bhushan, but gave the government two months to form a committee to deliberate on the matter and come up with suggestions.
The ruling comes in the wake of the stock markets regulator Securities and Exchange Board of India banning auditing firm PriceWaterhouseCoopers for a period of two years for its failure to detect the Satyam Computer scam.
“A common investor’s reliance on the audit certifications of SCSL (Satyam Computer Services Ltd) at the relevant point of time was dependent on the fact that it was attested by one of the internationally reputed firms called PW,” the SEBI had noted in its order.
“The public had no reason to believe that the audit reports were false and misleading. In this context, the long period during which the falsification of account books took place, without the same drawing the attention of PWCIL or other PW entities in India, points to a systemic problem in the audit process..” it had noted.
The public interest litigation wanted the Supreme Court to examine the practices of all auditing firms, and not just one, to check if the standards and practices followed by them are up to scrutiny.