SEBI mulls new whistle-blower mechanism for auditors, other ‘gate-keepers’

To unearth financial irregularities and other fraudulent transactions at listed companies, capital market regulator SEBI is planning to set up a new whistle-blower mechanism for auditors and other ‘gate-keepers’ to report such cases.

The proposed move assumes significance in the wake of several auditors in the recent past decided to exit from their audit mandate after certain listed companies failed to take remedial actions despite financial wrongdoings having been flagged in their auditors’ observations.

Officials said most of these auditor exits have taken place at a much later stage, but a ‘confidentiality mechanism’ can help in cases of financial frauds being reported at an early stage by auditors, independent directors and others considered to be ‘gate-keepers’ or ‘conscience keepers’.

Regulators and enforcement agencies have often stressed that auditors, independent directors, investment bankers, valuers and other such entities have a greater responsibility to ensure compliance to regulations and safeguard the interest by minority shareholders.

Informant mechanism

While Securities and Exchange Board of India (SEBI) has announced a new mechanism to reward informants with up to ₹ 1 crore cash for any credible inside information for providing information on insider trading at listed companies, this does not apply to corporate entities and professionals such as auditors and lawyers.

While there were suggestions from some quarters that auditors, lawyers and consultants on behalf of their firms should also be allowed to avail the ‘informant mechanism’, SEBI was of the view that corporate entities were as such under a duty to report.

Besides, lawyers are bound to confidentiality and it would be considered unethical for them to complain against their clients.

“However, as far as gate-keepers such as auditors are considered, a separate confidentiality mechanism is being proposed,” a top official said.

The proposal is in early stages as of now and a final decision would be taken only after a detailed consultation process with all the concerned stakeholders, the official added.

The proposed mechanism may cover all kinds of financial irregularities and fraudulent activities, unlike the ‘informant mechanism’ which is limited to the cases of insider trading.

During the earlier consultation process for the ‘informant mechanism’, it was also proposed that disgruntled employees and those facing complaints from the concerned entities should not be allowed to become an informant.

However, SEBI rejected the suggestion while observing that such people could be the best possible sources for providing evidence which was otherwise difficult to obtain.

However, SEBI has put in place sufficient safeguard to weed out unwanted tip-offs and frivolous information.

Officials said SEBI must employ all legitimate means to detect any wrongdoing and initiate action at the earliest to instil confidence among investors and ensure the integrity of the market.

But, SEBI faces several challenges in establishing links and procuring proof while probing cases like insider trading and other fraudulent activities, due to which investigation into such cases takes much longer time than in other cases of market manipulation.