SEBI accuses statutory auditors for fraud, etc.

SEBI
has passed an
interim
order
against various persons which also doubles up as a show cause notice (“SCN”)
on the erstwhile statutory auditors (“the Auditors”) of a listed company. The
Auditors are asked to show cause why directions should not be issued to debar
them from issuing certificates under several specified securities laws.


While
directions have been issued against the concerned listed company (Arvind
Remedies Limited or “Arvind”) and its Director/Promoter, the focus here is on
the action initiated against the Auditors.

Several
alleged irregularities were found in the accounts of Arvind. Sales, profits and
assets were said to have been heavily overstated and bogus/double accounts maintained. Huge write off in assets were made which has invited suspicion by
SEBI. The Managing Director was said to have been paid commission on the basis of
such alleged bogus sales. The price of the shares of Arvind fell substantially.
The Auditors resigned and a new firm of auditors was appointed. Action has been
initiated by SEBI against the previous/erstwhile auditors who audited the
accounts of Arvind during the period under investigation.

SEBI
has alleged that the Auditors were “…negligent in certifying accounts of ARL and failed to
maintain professional standards in Audit…(and)..therefore, enabled ARL and
its Director to perpetrate manipulation/fraud on genuine investors in the
securities market.”. SEBI has alleged
violation by the Auditors of multiple provisions of the SEBI Act and the SEBI
PFUTP Regulations. These provisions relate to serious acts such as fraud,
deceit, use of manipulative/deceptive device, etc.

SEBI has asked the
Auditors to show cause why they should not be banned from issuing certificates under
various Securities Laws (SEBI Act and Rules/Regulations issued thereunder,
under provisions of Companies Act, 2013 administered by SEBI, etc.).

A question had
arisen in the past whether SEBI had any power to take action against auditors
and whether this was the exclusive prerogative of the Institute of Chartered Accountants
of India. The Bombay High Court had held (in Price Waterhouse & Co. vs.
SEBI (2010) 103 SCL 96),
that “…it cannot
be said that in a given case if there is material against any Chartered
Accountant to the effect that he was instrumental in preparing false and
fabricated accounts, the SEBI has absolutely no power to take any remedial or
preventive measures in such a case.”.

Earlier too
(on which I had posted here),
SEBI had debarred an auditor of a listed company from issuing certificates under
various specified Securities Laws. There, SEBI had made a specific finding that
the auditor “had fraudulently certified the Annual Report, which it did not believe to be
true and had fraudulently caused the Annual Reports of the relevant
period to be published with untrue information” (emphasis mine).

The SCN/Order, however, is unclear in parts. On one hand, it alleges that the Auditors have made
serious violations of fraud, etc. On other hand, the Order says that the Auditors
were “…negligent
in certifying accounts of ARL and failed to maintain professional standards in
Audit..”. It will be
interesting to see how such negligence or failure to maintain professional
standards can be held to be fraud, deceit, etc.

In any case, if it
can be held that auditors have violated these provisions relating to fraud,
manipulation, etc., then apart from ban from issuing certificates, other powers
SEBI has of levying penalty, prosecution, etc. could also be invoked.


Needless to add,
action by SEBI does not rule out action by the Institute of Chartered
Accountants of India and also action under the Companies Act, 2013.

About the author

CA Jayant Thakur

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