SEBI HOLDS AUDITORS LIABLE FOR NEGLIGENCE/ CONNIVANCE IN FRAUD - DEBARS THEM FOR 5 YEARS
Jayant M. Thakur Chartered Accountant
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.
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.