These important issues have been recently answered by the
Bombay High Court in Price Waterhouse & Co. v. SEBI, [(2010) 103 SCL 96 (Bom.)].
As we will see later herein, the Court decided against the petitioners. However,
the Court stayed the proceedings for four weeks to allow filing of a special
leave petition to the Supreme Court. As of the date of writing this article, the
status of whether such a SLP has been filed or not is not known.
The issue is whether the work of an auditor should be judged
only by an expert body — that is — ICAI — an institution established under a
statute. It is a matter of serious concern if the same work is also scrutinised
by another authority that may reach a different conclusion and this also results
in multiple actions/
proceedings.
There is also another important reason to be concerned.
Chartered Accountants generally and even as Statutory Auditors are not required
to be ‘registered’ with SEBI. SEBI closely controls registered intermediaries
not only through the process of registration and suspension/cancellation of
registration, but also by closely regulating them through Rules and Regulations.
If SEBI can control and act against unregistered intermediaries, particularly if
they are regulated by another body, it would be a worrisome precedent for not
just chartered accountants, but any person having anything to do with listed
companies or capital markets.
Further, the anxiety is also because the type of action that
the SEBI Act permits is quite wide-ranging and the show-cause notice (‘the SCN’)
that SEBI issued in this matter showed this. The SCN pointed out several actions
that SEBI considered taking, assuming that the allegations were proved. For
example, it said: it would consider banning the auditors from carrying out
statutory audit or other audit/certification of not just listed companies, but
of any other intermediary, etc. registered with SEBI. It would also ban the CA
from ‘accessing the securities markets’ (though it is not clear how a CA may
access it) and certain related actions. It would even initiate prosecution that
may entail a fine of up to Rs.25 crores and imprisonment up to 10 years.
Thus, to summarise, the result would be multiple authorities
judging the auditor, resulting into multiple action and consequences.
It is to be clarified that the SCN was challenged on the
issue of the jurisdiction of SEBI to initiate action. There was no finding of
facts and the Court merely held that it is up to SEBI to investigate the actual
facts and first establish the allegations. But the Court also held that:
The issue arose out of the Satyam Computers episode where
several accounting and related frauds have been alleged and are as widely
reported, backed also by an email by Mr. Raju. The issue relating to the role of
the auditors arose as to whether there was any failure/deficiency in the
performance of their professional duties and/or whether there was connivance.
Now let us review the decision in a little more detail.
SEBI issued a show-cause notice to the auditors and certain
other parties. It alleged that in respect of the various alleged accounting
frauds including showing higher revenue, profits, assets, etc., the auditors and
other specified persons did not perform their professional work properly. It
thus asked these parties to explain their stand and said that if the
explanations were not found satisfactory, then it may take actions such as
banning the parties from carrying out audit, etc. of listed companies and
registered intermediaries, accessing capital markets, etc. It even stated that
prosecution may also be considered.
The parties raised a preliminary issue that since they were
Chartered Accountants carrying out professional work and since their
professional work was sought to be judged, they should be judged by the ICAI
only and SEBI had no jurisdiction.
SEBI, however, stated that auditors of listed companies were
entities associated with the capital market and since SEBI’s role was to protect
the integrity of capital markets, it had the right to take action against
persons associated with capital markets. Hence, SEBI has the jurisdiction.
Various issues were raised and it is worth running through
how the Court dealt with them.
The fundamental question is whether SEBI has jurisdiction
over Chartered Accountants or whether the ICAI has exclusive jurisdiction which
SEBI cannot encroach on? The Court raised the issue: (emphasis supplied in all
extracts of the decision in this article):
“However, it is required to be examined as to whether in substance by initiating the proceedings under the SEBI Act, the SEBI is trying to overreach or encroach upon the power conferred under the CA Act.”
“Looking to the provisions of the SEBI Act and the Regulations framed thereunder, in our view, 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, SEBI has absolutely no power to take any remedial or preventive measures in such a case. It cannot be said that SEBI cannot give appropriate directions in safe-guarding the interest of investors of a listed company. Whether such directions and orders are required to be issued or not is a matter of inquiry. In our view, the jurisdiction of SEBI would also depend upon the evidence which is available during such inquiry. It is true, as argued by the learned counsel for the petitioners, that SEBI cannot regulate the profession of a Chartered Accountant. This proposition cannot be disputed in any manner. It is required to be noted that by taking remedial and preventive measures in the interest of investors and for regulating the securities market, if any steps are taken by SEBI, it can never be said that it is regulating the profession of the Chartered Accountant. So far as listed companies are concerned, the SEBI has all the powers under the Act and the Regulations to take all remedial and protective measures to safeguard the interest of investors and the securities market. So far as the role of Auditors is concerned, it is a very important role under the Companies Act.”
Further, the Court reviewed the Chartered Accountants Act and the powers therein and did not find any contradiction. Since SEBI was not really seeking to regulate the profession of Chartered Accountants, the Chartered Accountants Act could not prevent SEBI from taking action of the nature proposed in the SCN.
Can SEBI order that an auditor shall be prohibited from auditing the accounts of a listed company? This is what the Court held:
“It is not uncommon nowadays that for financial gains, even small investors are investing money in the share market. Mr. Ravi Kadam has rightly pointed out that there are cases where even retired persons are investing their retiral dues in the purchase of shares and ultimately, if such a person is defrauded, he will be totally ruined and may be put in a situation where his life savings are wiped out. With a view to safeguard the interests of such investors, in our view, it is the duty of the SEBI to see that maximum care is required to be taken to protect the interest of such investors so that they may not be subjected to any fraud or cheating in the matter of their investments in the securities market. Normally, an investor invests his money by considering the financial health of the company and in order to find out the same, one would naturally bank upon the accounts and balance- sheets of the company. If it is unearthed during inquiry before SEBI that a particular Chartered Accountant, in connivance and in collusion with the Officers/ Directors of the company has concocted false accounts, in our view, there is no reason as to why to protect the interests of investors and regulate the securities market, such a person cannot be prevented from dealing with the auditing of such a public listed company. In our view, the SEBI has got inherent powers to take all ancillary steps to safeguard the interest of investors and securities market. The powers conferred under various provisions of the Act are wide enough to cover such an eventuality and it cannot be given any restrictive meaning as suggested by the learned counsel for the petitioners. It is the statutory duty of the SEBI to see that the interests of the investors are protected and remedial and preventive measures are required to be taken in this behalf. It is required to be noted that in the instant case the inquiry is still pending, ultimately the decision is required to be taken by SEBI on the basis of available evidence on record. However, in order to determine the jurisdiction of SEBI, the contents of the show-cause notice which is the first step of initiating proceedings are required to be seen. Reading the contents of the show-cause notices and the relevant statutory provisions, it cannot be said that SEBI has no jurisdiction at all to enquire into the affairs of the petitioners insofar as it relates to Satyam.”
The Court made it clear that SEBI definitely has jurisdiction in such matters by observing, “In our view, it cannot be said that the show -cause notices issued by SEBI are, on the face of it, not sustainable on the ground that SEBI has no jurisdiction to enter into the affairs of the petitioners or that it lacks jurisdiction to go into such questions.”
A critical question that often arises is who are persons associated with the securities markets since that would give jurisdiction to SEBI to inquire and take action. Thus, the question is whether auditors are such persons associated with the securities market. The Court answered in the positive, stating, “even though the petitioners may not have direct association in share market activities, yet the statutory duty regarding auditing the accounts of the company and preparation of balance-sheets may have a direct bearing in connection with interest of the investors and the stability of the securities market. In our view, the petitioners in their capacity as auditors of the company Satyam, which was at one point of time considered to be a blue chip company who had a defining influence on the securities market, can be said to be persons associated with the securities market within the meaning of the provisions of the said Act.”
The Court also held that the power of SEBI is over and above the provisions of S. 227 of the Companies Act, 1956, which provided for removal of an auditor. Thus, it negatived the contention that removal of auditor can only be u/s.227. The Court also compared the powers under SEBI Act with the powers under the Consumer Protection Act and said that neither of this can be said to be encroaching on the powers of ICAI. The Court also rejected the argument that such proposed action by SEBI would amount to infringement of fundamental rights under Article 19(1)(g) of the Constitution of India.
Interestingly, the Court held that the criteria for determining proper performance of duties by the auditors were the very audit norms prescribed by ICAI. The Court, observed, “However, if it is found in a given case that the Chartered Accountant has violated the audit norms prescribed by the Institute under the CA Act, the SEBI can certainly consider the said aspect in order to find out as to whether such a professional person should be allowed to continue to function as an Auditor of a listed company if by continuing such person as an Auditor of a listed company, it may hamper the interest of the investors of such a listed company.”
An interesting aspect is whether SEBI would have jurisdiction only when there is a mala fide intention or connivance by the auditors or whether professional negligence without such an active involvement is also covered. It is not clear from the decision, but the Court did make some interesting observations. An example of such an observation of the Court is:
“In a given case, if ultimately it is found that there was only some omission without any mens rea or connivance with anyone in any manner, naturally on the basis of such evidence the SEBI cannot give any further directions.”
Another thought that comes to the author is: whether the views of ICAI should have been taken here in some manner, since at least indirectly the issue related to the exclusive jurisdiction of ICAI.
