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.

Source: Corporate

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