SEBI suffered a major set back as the Securities and Appellate Tribunal (SAT) on Monday overturned an order of the market regulator that had barred global auditing firm PriceWaterhouse (PW) for two years from working for listed companies.

According to experts, SAT’s order will have a far-reaching impact on future adjudications by SEBI as the tribunal said the market regulator has no authority to look into the quality of audit standards and audit services.

SAT further said that SEBI can only take remedial and preventive action, and the direction issued to ban PW is neither remedial nor preventive, but just punitive.

In January 2018, SEBI barred PW and its network entities and even fined them ₹13.09 crore, along with interest at 12 per cent per annum from January 2009 for wrongful gains. 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, as PW was the company’s auditor. “This is a significant judgment. Unlike income-tax laws where the revenue department has to follow certain criterion before ordering a forensic audit, there are none prescribed in securities laws. SEBI routinely passes orders for forensic audit questioning the accounting and/or auditing of listed companies. This discretion is bound to be relooked at in view of this SAT judgment.” said Sumit Agarwal, a Partner at Regstreet Law Advisors.

The SAT, in its 125-page and 140- points-long judgment said that the applicability of the Prevention Fraudulent and Unfair Trade Practices (PFUTP) can be extended only to persons who are associated with the 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.

“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,” it added.

How SAT demolished SEBI case against PW

SAT in its 125 page and 140 points long judgement said that the applicability of PFUTP can be extended to persons who are associated with the 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. In order 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,” the SAT order said.

As per SAT, SEBI has to bring evidence on record indicates that certain directors and employees had connived in the fabrication, falsification and misrepresentation in the books of account and financial statements of Satyam Computers. The books of account contained false and inflated current account bank balances, fixed deposit balances, fictitious interest from sales.

“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. In fact, the Chairman of SCSL has gone on record in so many words that the statutory auditors were kept in the dark and that they had no role to play in the fudging of the books of account. In our view, action against a Chartered Accountant can be taken only in terms of Chartered Accountants Act, 1949. SEBI cannot in 56 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 (Institute of Chartered Accountants of India).

SAT said, SEBI on the basis of the material was required to prove that the audit firm or the engagement partners had willfully with intent and knowledge connived with the management of SCSL in the fabrication and falsification of the accounts and induced the investors in taking a wrong decision. No such finding has been arrived at by the whole time member in his order.

SAT pointed out as to how it took SEBI nine years to decide on the case. SEBI 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 on SEBI. The request of the appellants to cross examine certain individuals whose statements were relied upon by SEBI was rejected. This Tribunal on June 1, 2011 allowed the appeal and directed SEBI to allow cross examination. SEBI did not do so and took the matter to the Supreme Court and kept it pending for six years. The Supreme Court on January, 2017 held that the stand of SEBI was incorrect and directed 122 that cross examination and inspection should be allowed to the appellants," SAT order said.

The SAT said that if the appellants (PW) violated the provisions of the Companies Act they can be prosecuted there under but the respondent (SEBI) cannot invoke the SEBI laws in this cavalier fashion which violates the appellants’ fundamental right to carry on business as envisaged under Article 19(1)(g) of the Constitution of India.  

"Unlike Income Tax laws where revenue department has to follow certain criterion before ordering a forensic audit, there are none prescribed in securities laws. SEBI routinely passes orders for forensic audit questioning the accounting and /or auditing of listed companies. This discretion is bound to be relooked at, in view of this SAT judgement.” said Sumit Agrawal, Partner, Regstreet Law Advisors.

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