The Securities Appellate Tribunal has quashed the SEBI order imposing a two year ban on the accounting firm Price Waterhouse(PW) for its alleged involvement in the Sathyam scam.
The ban was imposed by the Whole Time Member(WTM) of the Securities and Exchange Board of India (SEBI) in January 2018 under Sections 11, 11B of the SEBI Act barring PW from directly or indirectly issuing any certificate of audit of listed companies, compliance of obligations of listed companies and intermediaries registered with SEBI under the applicable laws for a period of two years. Two former PW partners — S Gopalakrishnan and Srinivas Talluri — were also barred from issuing audit certificates to listed companies for three years. SEBI investigated PW after the Satyam scandal came to light in 2009.
"We find that there is no direct evidence to show that the engagement partners/audit firms/other PW firms were directly involved in the fabrication of the books of account of SCSL (Satyam). In fact, the Chairman of SCSL has gone on record that the statutory auditors were kept in the dark and that they had no role to play in the fudging of the books of accounts," said SAT members Tarun Agarwala and C K G Nair in a 125-page order delivered on September 9.
The SAT however agreed with the SEBI findings that there was "professional lapse" on the part of PW and upheld the direction on disgorgement of Rs. 13 crores earned by PW as retainer fee from SCSL.
"There is no doubt that there has been a professional lapse on the part of the auditors in conducting the audit, especially their failure to seek direct confirmation from the bank relating to bank balances and fixed deposits. These lapses amounted to negligence. Action has already been taken by the Institute of Chartered Accountants of India (ICAI) against the auditors," the SAT order stated.
"The WTM found that for this negligence, the auditors and the firms benefitted by way of charging a fee amounting to Rs. 13,09,01,664/-. The WTM was of the opinion that this wrongful gain was liable to be disgorged. We find that for this professional lapse, there has been a breach of duty and failure to maintain that standard of care. For this lapse / negligence, we are of the opinion that the appellants were not justified to retain this amount. In our opinion, the WTM was justified in disgorging the said amount along with interest.", ordered the SAT.
The SEBI findings against PW
The balance in the current and fixed deposit accounts of Satyam Computer Services Ltd (SCSL) with Bank of Baroda, New York Branch were overstated by thousands of crores rupees. The firm failed to seek direct confirmation of bank balance from banks. The manner in carrying out the verification of the bank balance and fixed deposits was not in accordance with Auditing and Assurance Standards (AAS) issued by ICAI which was a mandatory requirement. Having failed to comply with the audit procedures as mandated under AAS, the appellants failed to fulfill these basic professional duties of an auditor.
By not seeking external confirmation of the bank balances, the auditors had failed to exercise care and prudence and adhere to the standards and procedures.
The carefully laid out scheme of fraud and fabrication of accounts in SCSL by the top management of SCSL was not possible without the knowledge and involvement of the statutory auditors.
Findings of conspiracy overturned by SAT
The Appellate Tribunal held that Prevention Fraudulent and Unfair Trade Practices (PFUTP) Regulations cannot be extended to auditors who are not associated with securities directly or indirectly.
"Admittedly, the 53 appellants (associated with PW) are not dealing in the securities either directly or indirectly. They are auditors for listed companies. To bring them culpable within the four corners of Section 12A and Regulation 3 and 4 of PFUTP Regulations, fraud has to be proved on the basis of evidence," it said.
Referring to the 2017 SC decision in SEBI vs. Shri Kanaiyalal Baldevbhai Patel & Others, the SAT element of "inducement" must be proved for holding that a person is guilty of fraud under PFUTP Regulations.
"In the instance case, there is no finding that the appellants had induced someone and thereby played a fraud in the securities market. Assuming without admitting that the concept of preponderance of probabilities would also apply in the case of the appellants, still, it must be proved by cogent evidence that the appellants are guilty of "inducement". In the absence, of any evidence, the charge of fraud is not proved, nor the provisions of Regulation 3 and 4 of PFUTP Regulations applicable."
The SAT added that SEBI cannot take action against a Chartered Accountant for failure to meet accounting standards :
"action against a Chartered Accountant can be taken only in terms of Chartered Accountants Act, 1949. SEBI cannot in the garb of proving conspiracy and connivance on the part of the Chartered Accountant interpret the auditing standard on a standalone basis. The auditing standards can only be related to the professionalism of a Chartered Accountant vis-à-vis its professional misconduct which can only be considered by the ICAI. "
"By no stretch of the imagination, can a direction debarring an auditor from auditing the books of a listed company be said to be remedial in nature. A remedial action is to correct a wrong, or a defect. Preventive measure can be issued in a given case of unfair trade practice or where fraud is proved. However, in the instant case, the direction to debar the auditor from auditing the books of a listed company is neither remedial nor preventive," said the order.
The SAT also said the long delay in passing the final order in the Satyam matter was also unfair to the audit firm.
"The show cause notice was issued on February 14, 2009 and August 26, 2009. The impugned order was passed on January 10, 2018. It took Sebi nine long years to complete the proceedings and the fault lay entirely with Sebi."
The SAT criticized the SEBI for barring the entire PW network or the brand.
"As on the date of the impugned order there were 98 partners in the 10 firms, out of which 70 are new partners who were not partners of the PW firms during the period 2000–2009. Thus, banning them from doing audit work of listed company, merely because they are presently partners in PW firm, is in complete violation of Section 31(2) of the Partnership Act," the tribunal held.
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