January 2019

SEBI HOLDS AUDITORS LIABLE FOR NEGLIGENCE/ CONNIVANCE IN FRAUD - DEBARS THEM FOR 5 YEARS

Jayant M. Thakur
Chartered Accountant

BACKGROUND


Auditors have been the focus of several regulators, each of whom seek independent and wide powers to take action against them when they perceive that auditors have not discharged their duties properly. SEBI has taken action against several auditors of listed companies where SEBI felt that auditors were negligent, did not discharge duties mandated by law and / or where there is connivance with the management in fraud, etc.

 

However, whether and to what extent SEBI has powers to act directly against the auditors has been controversial. There are several SEBI orders, a report of consultation committee of SEBI, a detailed decision of the Bombay High Court, etc., that have differing views. Some of the decisions of SEBI/SAT are under appeal. SEBI has recently proposed amendments to regulations to prescribe duties of auditors and the action SEBI can take in the event the prescribed duties are not discharged. The powers SEBI is seeking may be questioned before courts particularly on the issue whether the provisions SEBI Act are wide enough to provide for powers merely by amending the Regulations. Thus, the coming years will see several developments before a clearer picture emerges.

 

In the meantime, SEBI has passed yet another order debarring a firm of auditors for 5 years from carrying out any certification work for any listed company or any intermediary associated with the capital markets. In the case of C. V. Pabari & Co., (“the Auditors”) SEBI has passed order No : WTM/MPB/ISD-FAC/57/2018, dated 31st October 2018 relating to audit of Parekh Aluminex Limited. There are several findings of erroneous accounting and presentation in financial statements, in addition to diversion of funds, over valuation, etc., and violations of provisions of the Companies Act.

The Order also debars for 5 years the Wholetime Executive Director, who was also earlier the Chairman of Audit Committee. However, this article focuses on the action taken against the auditors, on the facts and the reasons provided by SEBI for debarring the auditors for five years.

 

BROAD BACKGROUND AND SUMMARY OF THE ORDER.


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