Satyam Fraud: SAT Quashes SEBI’s Two-Year Ban On PwC India
Vehicles pass in front of the PwC high-rise office building. (Photographer: Adam Glamzman/Bloomberg)

Satyam Fraud: SAT Quashes SEBI’s Two-Year Ban On PwC India

The Securities Appellate Tribunal quashed the market regulator’s order that barred PwC’s India network from conducting audit of listed companies after finding one of its firms guilty of lapses in the accounting fraud at the erstwhile Satyam Computers Services Ltd.

The order of Securities and Exchange Board of India is not sustainable, the tribunal said in an oral order today.

In January 2018, SEBI had barred Price Waterhouse entities from, among other things, directly or indirectly issuing audit certificates to listed companies for two years. That followed a probe into the role of the auditors in India’s biggest accounting fraud after Satyam founder Ramalinga Raju admitted to cooking up books in 2009.

SEBI had found Price Waterhouse Bangalore and its two erstwhile partners—S Gopalakrishnan and Srinivas Talluri—guilty of not complying the auditing standards prescribed by the Institute of Chartered Accountants of India.

PwC challenged SEBI’s order before the SAT, arguing that all entities holding the ‘Price Waterhouse’ name should not be punished as they were not connected to or related to alleged violations committed by Price Waterhouse, Bangalore.

Also read: The Undoing Of Price Waterhouse In The Satyam Scam Case

The tribunal, which had allowed PwC to continue auditing listed firms till the case is pending, today quashed the market regulator’s order on the following grounds:

Parameters Framed By The Bombay High Court

PWC India had approached the Bombay High Court in July 2010 for quashing of show-cause notices issued by SEBI. While disposing the appeals, the high court had narrowed the scope of enquiry by SEBI in the present case.

SEBI was directed by the high court to check whether there was a conspiracy and involvement of the auditors in the fraud at Satyam Computers. The high court had noted that PWC was a chartered accountancy firm and involved in the audit of books of accounts.

Relying on directions of the high court, the tribunal held that SEBI deviated from the scope of enquiry by holding that negligence by the auditors amounted to fraud under its Prohibition of Fraudulent and Unfair Trade Practices regulations.

Mens Rea- Guilty Intention and Fraud

Mens Rea, or an intention to commit crime, is an essential element to prove guilt in certain offenses. The court held that SEBI’s approach in equating recklessness with mens rea was erroneous.

The findings by a whole-time member of the regulator were based on the premise that the auditors were reckless and negligent in conducting the audit. Hence, the tribunal concluded that SEBI could not establish a finding which proved that the auditors had intention to connive or collude with the management in fabrication of accounts.

The approach adopted by the respondents is patently misconceived and based on surmises and conjectures. In the instant case, there is overwhelming evidence to show that the fabrication and falsification of books of accounts was done only by the top management of Satyam Computer Services Ltd. and that the engagement partners as well as the audit firm had no clue nor had any hand in this fraud.
Order of the Securities Appellate Tribunal 

Role Of An Auditor

The tribunal relied on past decisions of the Supreme Court and the English Court where it was consistently held that an auditor is bound to exercise a reasonable amount of care and skill.

There was no direct evidence to show that the PwC firms were responsible for fraud. Statutory auditors were kept in the dark by the management of Satyam Computers. Action against the auditors by SEBI was based on a preponderance. SEBI cannot prove the role of auditors by merely relying on a paragraph in the auditing and assurance standards issued by the ICAI.

Liability Of Network Firms

The tribunal relied on resource sharing agreements between the PWC audit firms in India and made the following observations:

  • The audit firms do not operate as one corporate firm or agents for each other.
  • The firms are separate legal entities with Indian ownership and lack any cross shareholding in each other.
  • The audit firms have separate bank accounts and are treated as independent entities for accounting and taxation purpose.

The tribunal noted that the regulator erred by considering that a common brand and resource-sharing agreement indicates that all PWC audit firms were involved in the audit of Satyam Computers.

Fraudulent And Unfair Trade Practices

PwC was not engaged in dealing of securities. Any charge under the FUTP regulations can be imposed only when a charge is proved. No evidence was found to show that PwC was engaged in fudging of accounts.

Lack Of Jurisdiction

Matters of gross negligence by an auditor fall within the regulatory powers of the Institute of Chartered Accountants of India and, therefore, provisions of the SEBI Act cannot be used to initiate action against the auditors. Such actions by the regulator violate the Constitution of India. Debarring auditors is beyond the power of SEBI.

Remedial Action

The scheme of the SEBI Act empowers the regulator to take actions on a preventive or remedial basis. However, banning the auditors is punitive and, therefore, beyond the powers of the SEBI Act. If a person is not dealing in securities, actions by regulators under FUTP regulations can only be remedial in nature.

Under the SEBI Act, the SAT order can be challenged in the Supreme court.

Impact On Ongoing Investigations

The order of the tribunal comes at a time when the Ministry of Corporate Affairs is investigating the role of Deloitte Haskins and Sells and BSR & Associates and had sought a five-year ban on the auditors alleging that they had colluded with the management in dubious lending practices at the IL&FS Group.

The ruling is based on the facts and evidence placed before the Securities Appellate Tribunal in this specific matter. Therefore, the ongoing investigation against the auditors at the National Company Law Tribunal should be treated independently of this
Anand Desai, Managing Partner, DSK Legal

“Given this verdict of SAT and its observation that reliance on auditing standards would at best lead to finding a lapse in the professional work of CA which can become a ground for professional misconduct to be taken up strictly by ICAI, is likely to provide some relief to statutory auditors,” Vaibhav Kakkar, partner at Luthra & Luthra, told Bloomberg Quint.

This verdict would assume relevance in the backdrop of pending investigations undertaken by Serious Fraud Investigation Office against certain statutory auditors and its authority to pass directions or orders especially in cases of mere professional negligence remains to be seen, he said.

I’m pleased to note that banning of audit firms entirely will be restricted only for the rarest of occasions—liability should be proportionate to one’s responsibility in something that went wrong. It is also suggested that there must be a time limit between a regulatory order and the appeals process, so that justice isn’t delayed.
Vishesh C Chandiok, Chief Executive Officer, Grant Thornton India LLP
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