The Securities Appellate Tribunal (SAT) in its order dated 9th September 2019 quashed the two-year ban on the global auditing audit firm Price Waterhouse (PW) imposed by the Securities and Exchange Board of India (SEBI) in the wake of the Satyam Computer fraud in 2009.
In January 2009 the chairman of Satyam, B Ramalinga Raju, confessed that he had manipulated the accounts of Rs 14,162 crore in past few years. He confessed that the company misrepresented its accounts both to its board, stock exchanges, regulators, investors and all other stakeholders. The fraud misled the market and other stakeholders by lying about the company’s financial health. Even revenues, operating profits, interest liabilities and cash balances were grossly inflated to show the rosy picture of the company.
PricewaterhouseCoopers (PwC) served as independent auditors of Satyam Computer Services when the news of scandal in the account books of Satyam Computer Services broke out. The Indian arm of PwC was fined $6 million by the SEC (US Securities and Exchange Commission) for not following the code of conduct and auditing standards in the performance of its duties while auditing of the accounts of Satyam Computer Services. In 2018, SEBI barred Price Waterhouse from auditing any listed company in India for 2 years, saying that the firm was complicit with the main perpetrators of the Satyam fraud and did not comply with auditing standards. SEBI also ordered disgorgement of over Rs 13 crore wrongful gains from the firm along with its 2 partners.
PW filed an appeal against the SEBI order with SAT questioning the legality and veracity of the impugned order. On 9th September, 2019 SAT decided to quash the order of SEBI which had debarred the PW firms as well as the two auditors – S. Gopalakrishanan and Srinivas Talluri from auditing listed Companies. The SEBI directions to listed Companies not to engage any audit firm forming part of PW network has also been quashed.
Takeaways of SAT’s order against PriceWaterhouse
SEBI suffered a major setback as the SAT overturned an order of the SEBI that had barred global auditing firm PriceWaterhouse (PW) for two years from working for listed companies.
The SEBI order debarring the PW firms as well as the two auditors from auditing listed companies was not sustained and quashed. Directions to listed companies not to engage any audit firm forming part of the PW network were also quashed.
The SAT, however, maintained the Rs 13-crore disgorgement order stating, given the lapses and negligence, PW wasn’t justified in retaining the fee it earned from Satyam.
“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.
What went in PW’s favour
- Huge time (nine years) taken by SEBI to complete the proceedings in the Satyam matter
- PW’s “blemish-free” record since the scam came to light
- “Extensive remedial measures” adopted by PW following SEC, PCAOB orders
- Over 70% of partners at PW came on board after 2009
- Action against entire PW network for wrongdoing of a few not justified
- Action taken by ICAI against auditors in the matter
SEBI had passed the order against PW and its auditors under the special powers conferred upon it to protect the interests of investors in the securities market. As a result, the SAT held that the order was “remedial” and not “punitive” and debarring an entire audit firm wasn’t justified.
SEBI’s jurisdiction over Chartered Accountant (CA) was upheld by Bombay High Court. The impugned order from SAT clarified that the above Bombay High Court directions came with a caveat, namely, that unless and until the evidence on record established the ‘jurisdictional fact’, SEBI could not exercise any jurisdiction under the SEBI Act against a Chartered Accountant. ‘A “jurisdictional fact” is a fact which must exist before a Court, Tribunal or an Authority assumes jurisdiction over a particular matter. The jurisdiction of SEBI would depend upon the evidence which is available during such enquiry and if any material evidence was found against a Chartered Accountant to the effect that he was used as an instrument in preparing false and fabricated accounts, then SEBI had the power to take any remedial measures or preventive measures in such a case. This evidence was never sustained against PW.
There is significant evidence to show that the fabrication and falsification of books of accounts was done only by the top management of SCSL and that the engagement partners as well as the audit firm had no clue nor contributed in any way in this fraud.
There is no shred of evidence of any connivance or collusion nor there is any finding of actual collusion or connivance by the partners and / or by the audit firm with the management of Satyam Computers.
“There is no shred of evidence that the auditors fabricated, fudged or were in collusion with the management of Satyam Computer Services,” the SAT order stated.
The order of SAT means that PW can continue auditing listed companies but SEBI can approach to the Supreme Court. The order raises an important jurisdictional point. At present, the National Financial Reporting Authority is not fully functional. Even assuming it was the jurisdictional issue will still crop up when it comes to action taken against auditors by SEBI or the RBI. Almost certainly, the Supreme Court will have the final word on this
Some may of the view that the judgment is based on the technicalities. But in our view judgment serves the natural justice. The auditor is fundamentally required to employ reasonable skill and care but is not required to begin with suspicion or proceed in the manner of trying to detect a fraud, unless some information has been received which creates suspicion. Reasonable care and skill depends upon the circumstance of each case. Thus the duty of an auditor is verification not detection.
It is ripe time for ICAI to take initiative and show leadership in conveying and educating the investors, regulators and other stakeholders about the need to constructively assess/review the performance of the auditor and then come to conclusion whether the auditors have failed to take reasonable precautions to identify the fraud. The auditor’s reputation have been badly impacted in the last decade and I sincerely hope that this SAT order will set the ground clear for the chartered Accountants in the upcoming future.
CA Vijay Kumar Gupta is a fellow member of the Institute of Chartered Accountants of India having more than fifteen years of experience in the profession of Chartered Accountants including includes Statutory Audit, Tax Audit and Internal Audit, FEMA and legal matters. He did his graduation from Delhi University and is also Arbitrator in the panel of Arbitrators of NSE and BSE.
He is also a Forensic Accounting and Fraud Detection Auditor. He has been contributing towards Income Tax updates in the “CA Samadhan Series” and also rendering services to the profession as speaker/faculty at various seminars and delivered lecturers on “Company Law”. He is also currently serving as Treasurer at NIRC of ICAI (year 2019-20)