The Securities and Exchange Board of India (SEBI), which has time till July to pass an order against PriceWaterhouse in the matter related to Satyam Computer Services, could bar the auditor from dealing with listed companies for a certain period of time on charges related to alleged negligence and professional lapses while being the auditors of erstwhile IT major.
The regulator is of the view that the auditing firm — along with its partners — can be barred from the securities market by making its opinion or services inadmissible in the case of entities that are regulated by SEBI, said a person familiar with the matter.
“There have been cases when SEBI has acted against statutory auditors and partners by barring them from directly or indirectly issuing any certificate required under securities laws for a fixed period of time,” said a person familiar with the matter. He declined to be identified as the final order is yet to be issued.
Speaking on the sidelines of a conference on Wednesday, SEBI chairman Ajay Tyagi said that the Bombay High Court had ruled that SEBI does have jurisdiction on auditors as public shareholders can be affected by their actions.
When asked if SEBI had powers to ban an auditor from dealing with listed companies, he said that “theoretically, it can happen... SEBI can issue directions” if an audit has not been done properly as shareholders were dependent on it.
In 2010, SEBI issued a show-cause notice to Price Waterhouse, among many other entities, after it emerged that the accounts of Satyam were falsified and inflated.
This followed the letter written in January 2009 by the then chairman of Satyam, B. Ramalinga Raju in which he said that the balance sheet of the company included inflated and non-existent cash and bank balances.
Jurisdiction challenged
The audit firm, however, filed a petition challenging the jurisdiction of SEBI over audit firms that are regulated by the Institute of Chartered Accountants of India (ICAI). The Mumbai High Court had ruled that given the powers of SEBI, it can act against the auditors if their actions impact the public shareholders at large.
In January, the Supreme Court directed SEBI to expedite the investigation and conclude the probe by July. On May 9, the audit firm went to SEBI for a hearing before the whole-time member, as per information available on the regulator’s website.
“The current proceedings at SEBI are in an old matter where we are participating in usual course and no such action by SEBI is either apprehended or even conceptualised at this stage while proceedings are ongoing,” said a Price Waterhouse spokesperson in response to an email query sent by The Hindu .
‘Precedent exists’
Interestingly, any action taken by SEBI against the auditors would not be the first of its kind.
In February 2016, the regulator barred Shashi Bhushan, proprietor of Bhushan Aggarwal & Co from issuing any certificate required under securities laws for a period of one year in the matter of Ritesh Properties and Industries Ltd. The SEBI probe found the firm guilty of misrepresenting and false reporting of accounts.
“... disclosure of true and fair information is crucial for investor protection and to maintain and restore their confidence in the securities market.
“The false and misleading disclosures in financial statements as found in this case are not only detrimental to the interests of investors but also endanger integrity of the securities markets,” stated the order.
In another case, Amar, Ashok and Associates’ partners faced action from SEBI by being barred from the securities market for five years. In the case of United Spirits Ltd. as well, the regulator had stated that “the role of the auditors, inter alia, in the non-detection of diversion of funds from USL (United Spirits Ltd.) is also being examined separately by SEBI.”
“Ensuring reliable financial reporting is no less [an] investor protection function. In suitable cases, they [SEBI] should hit hard and the sanction needs to be quick to be effective,” said Sumit Agrawal, Partner, Suvan Law Advisors.
“In recent years, SEBI has passed few widely-worded orders against CAs and auditors.
“While the Bombay HC had held auditors to be ‘persons associated with securities market’ and amenable to SEBI’s jurisdiction, SEBI needs to take stringent action only where evidence of collusion or fraud is found but not where a professional had a ‘good faith error in their judgment’,” said Mr. Agrawal, who had earlier worked as an assistant legal advisor at the SEBI.
Published - June 21, 2017 08:45 pm IST
