SEBI has, probably for the first time, barred a Chartered Accountant and auditor of a listed company from issuing certificates for a wide range of entities and purposes. The bar, though not a total one, is fairly wide both in respect of the services he can render and the entities to which he can render such services.
The order of SEBI (“the Order”) is in the case of Shri Shashi Bhushan, Proprietor of M/s. Bhushan Aggarwal & Co., in the matter of Ritesh Properties and Industries Limited (Order No. WTM/RKA/EFD/23/2016 dated 17th February 2016).
Summary of THE Order
The matter concerned a listed company (“the Company”) that was alleged to have carried out several accounting irregularities such as inflated revenues/profits, incorrect classification of assets, etc. The report of the Auditors did not point out these irregularities. In a subsequent year, the Company actually reversed by way of restatement the whole of such inflated revenues of the two years under consideration. The price of the shares of the Company had moved from Rs. 3.52 to Rs. 123.50 during the period that the order covered. An earlier order of the SEBI on the Company gives more details of other alleged violations by the Company.
The Company, as per the order, was engaged in real estate/ land related activities. The Company had recognized substantial revenues that were shown to have resulted in significant profits. SEBI appointed an independent Chartered Accountant to conduct special examination of the accounts of the Company. SEBI recorded a finding that there were serious accounting irregularities that had resulted in overstatement of revenues/profits. SEBI considered this not only to be a fraud by the Company but also alleged that the auditors abetted the company in doing so. Consequently, SEBI passed prohibitory directions to such Chartered Accountant.
Violations of Accounting Standard/Guidance Notes
SEBI considered the relevant requirements of Accounting Standard 9 on Revenue Recognition and the Guidance Note on Recognition of Revenue by Real Estate Developers issued by the Institute of Chartered Accountants of India. It examined the detailed facts of the case and contrasted the requirements of such Accounting Standard/ Guidance Note with the actual accounting practices followed by the Company. According to SEBI, “correct accounting procedures and practices had not been followed in preparation of financial statements of the Company”.
Allegations/findings of SEBI against the Auditors
SEBI stated that, “It was observed from the analysis of the report 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, in spite of the presence of unusual features in the accounts of the Company”. SEBI made certain further observations such as:-
“… the Auditor had fraudulently omitted to disclose…”
“It was alleged that as a statutory auditor of the Company, the Auditor failed to notice that the Company had not followed the accounting standards for recognising revenue.”
– “The Auditor had certified the overstated revenue and profits recognised by the Company in violation of the applicable Accounting Standards for recognising revenue from real estate business.”
– “In spite of the presence of unusual features in the accounts which prima facie gave reason to believe that the revenue recognised by the Company was not in order, the Auditor had willfully/ fraudulently failed to take note of the same while certifying the accounts of the Company. The aforementioned commissions and omission by the Auditor prima facie indicated the intention to benefit the Company in disseminating the false financial position and to defraud the investors by not giving the true and fair picture of the Company’s financial position.”
– “…it was observed that knowing very well that what was being certified was not true and fair report of the Company, the Auditor had certified its Annual Reports, suppressing Related Party Transactions and showing inflated and false financial position of the Company only to defraud the general investors.”
SEBI alleged that the Auditors had contravened several provisions of the SEBI Act and PFUTP Regulations relating to fraudulent and other practices. After reviewing the submissions of the Auditors, SEBI concluded that:-
“…it has been established that correct accounting procedures and practices had not been followed in preparation of financial statements of the Company and the Noticee had falsely certified misleading Annual Accounts of the Company, containing distorted information, which he did not believe to be true but certified knowing that the same when published would be relied upon by the investors to be true and fair and such certification was intended for the benefit of the Company and its promoters/ directors in their alleged manipulation of price in the scrip of the Company. I, therefore, find that by the aforesaid acts and omissions the Noticee aided and abetted the Company in disseminating the false financial position and to defraud the investors by not giving the true and fair picture of the Company’s financial position and, thus, its acts and omissions amount to aiding and abetting in the fraudulent, unfair and manipulative acts in connection with dealing in the shares of Ritesh Properties and are covered within the definition of “fraud” and “fraudulent” under regulation 2(1)(c) of the PFUTP Regulations…” (emphasis supplied)
Direction of debarment against the Auditors
In view of this, SEBI passed prohibitory directions debarring the Auditors. The wording of the debarment are interesting (emphasis supplied):-
“… hereby prohibit Shri Shashi Bhushan, Proprietor of M/s. Bhushan Aggarwal & Co. from, directly or indirectly, issuing any certificate required under securities laws namely Securities Board of India Act, 1992 (sic), the Securities Contract (Regulations) Act, 1956, the Depositories Act, 1996, Rules, Regulations, Guidelines made thereunder, the Listing Agreement and the applicable provision of the Companies Act, 2013, the Rules, Regulations, Guidelines made thereunder which are administered by SEBI, with respect to listed companies and the intermediaries registered with SEBI for a period of one year.”
Some aspects need attention:-
– the prohibition is on issue of certificates and not reports.
– The certificate may be under any of the specified securities laws, viz., SEBI Act, SCRA and Depositories Act and the rules, regulations and guidelines issued thereunder. The laws specified, particularly the rules, regulations and guidelines are numerous.
– The certificate may be even under the the applicable provision of the Companies Act, 2013, the Rules, Regulations, Guidelines made thereunder which are administered by the Securities and Exchange Board of India.
– The certificate must be required under the said specified laws.
– The certificates may relate to listed companies as well as intermediaries registered with SEBI. The term intermediaries covers a wide range of entities active in the securities market.
Applicability to other professionals
It is not uncommon for SEBI to find such entities engaging in accounting irregularities. Clearly, while SEBI would take actions against such persons for such matters, the role of the Auditors would also now increasingly come into focus. This order may become thus one of the first of many such orders in the future.
While passing the order, SEBI stated, “This is also a fit case where SEBI needs to send a stern message to professionals who associate themselves with securities market so as to prevent them from indulging in such acts of omissions and commissions as found in this case.” (emphasis supplied). While these words do show SEBI’s desire to act strictly, the use of the word “professionals” needs attention. Other professionals such as Company Secretaries, lawyers, etc. too associate themselves with and advise entities in the securities markets. It can thus be expected that, in appropriate and similar cases, such orders may also be passed against other professionals such as Company Secretaries, lawyers, etc.
Locus standi of SEBI to pass such orders
It will be interesting to watch the progress of such orders and how appellate authorities/courts act in that regard. In Price Waterhouse vs. SEBI ((2010) 103 SCL 96), the Bombay High Court had observed that, “isst 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. It cannot be said that SEBI cannot give appropriate directions in safeguarding the interest of the investors of a listed 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.” (emphasis supplied). Thus, the Court endorsed the power of SEBI to take action against auditors who engage in such acts.
Whether SEBI has exclusive, parallel or overlapping jurisdiction over auditors?
In the present case, SEBI held the Chartered Accountant to have acted in a manner aiding and abetting in the fraudulent, unfair and manipulative acts, etc. as prohibited under the SEBI PFUTP Regulations. However, this obviously does not rule out actions by other authorities including ICAI depending on facts of each case. The auditor may also face action for non-reporting of fraud u/s. 143(12) of the Companies Act, 2013. Thus, Auditors (and other professionals) may see multiple actions under different provisions and from different authorities/ persons. And it is possible that the parties who can take action may only increase. For example, if and when the provisions relating to class actions u/s. 245 of the Companies Act, 2013, are brought into effect, there may be claims for damages/compensation too. Similarly, when brought into effect, NAFRA may also have a role. Concerns may also arise whether such actions can be exclusive or overlapping/multiple for essentially the same default.
The Bombay High Court in Price Waterhouse’s case cited earlier did make some distinction between the role of ICAI and SEBI. For example, it stated that, “It is true, as argued by the learned counsel for the petitioners, that SEBI cannot regulate the profession of Chartered Accountant. This proposition cannot be disputed in any manner”. However, it also held if SEBI takes “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”. Importantly, it also observed, “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, SEBI cannot give any further directions.”
These words do give broad guidance of what role SEBI has and where it can and cannot act. They affirm SEBI’s powers but at the same time limit them. Having said that, several concerns and issues still remain as to where the lines of demarcation, if any exist, are to be drawn, whether the role will be overlapping, whether the defense of double jeopardy for multiple punishments would be available, etc. Discussion of this would be beyond the scope of this article and competence of this author.
Conclusion
SEBI has powers to take action against a wide range of persons who are associated with the securities markets. Such persons are not merely those who are registered with SEBI as intermediaries or are listed companies whose securities are listed on stock exchange. Auditors and other professionals, independent directors, key managerial personnel, etc. are also persons who have been over the years been acted against by SEBI. The law is clearly developing and there are grey areas and concerns that hopefully will see more light on as time passes.
