In a serious setback, the SAT Monday quashed the two-year ban that Sebi had slapped on Price Waterhouse, an arm of PwC India, in 2018 for its role in the Rs 7,800-crore Satyam fraud, citing lack of jurisdiction and a host of other infirmities.
Overturning the markets regulator's order dated January 10, 2018 that slapped a two-year ban on Price Waterhouse from auditing any listed company, the Securities Appellate Tribunal, however, partly allowed disgorgement of the Rs 13 crore fee from the auditors.
The 125-page SAT order comes at a time when two of the big four are already under probe by various agencies for their role in IL&FS scam. The SFIO and other regulators are already probing the role of Deloitte, and BSR which is an arm of KPMG, while and a government plea to ban them for five years is pending with bankruptcy tribunal and the Bombay High Court.
The Satyam fraud came to light on January 8, 2009--in the middle of the global financial meltdown--when the company chairman and founder Ramalinga Raju publicly admitted to cooking the books to the tune of Rs 5,004 crore over a period of time, but a Sebi probe had found that the scam was much larger at Rs 7,800 crore.
Following the revelation, the government superseded the Satyam board and put the company on sale, which eventually saw TechMahindra taking it over in April of that year for around Rs 2,890 crore.
Setting aside the ban, SAT presiding officer Tarun Agarwala and member CKG Nair in their 125-page order said, only the Institute of Chartered Accountants can take any action against auditors and that frauds cannot be proved on the basis of negligence in auditing.
The SAT also ruled that negligence cannot amount to misconduct and Sebi action based on no direct evidence cannot be maintained. If the audit of Satyam was conducted in a careless or reckless way by the audit firm then action can only be taken under Chartered Accountants Act by ICAI and not by Sebi. And that if at all there is dereliction of duty, only those individuals who did the job can be punished and not their parent orgainsations.
In what can also impact Sebi's powers in future, SAT also ruled that it should not "encroach" upon the territories of other regulators or industry bodies like ICAI. As per the existing regulations the main purpose of Sebi is to protect investors' interests and so its actions must be remedial and not punitive.
"In our view, action against a CA can be taken only in terms of the Chartered Accountants Act of 1949. Sebi cannot in the garb of proving conspiracy and connivance on the part of the CA interpret the auditing standard on a standalone basis.
"The auditing standards can only be related to the professionalism of a CA vis-a-vis its professional misconduct which can only be considered by the ICAI," the tribunal said.
The SAT order further said, "a financial fraud cannot be proved only on alleged gross negligence, carelessness or recklessness as amounting to collusion and connivance on a preponderance of probabilities."
Questioning the jurisdiction of Sebi, SAT pointed out that "Sebi has no authority to look into the quality of audit and auditing services. Sebi can only take remedial and preventative action. The direction issued is neither remedial nor preventive but punitive."
Absolving the auditors of any serious wrong doings, SAT said the evidence that has been brought on record indicates that certain directors and employees had connived in the fabrication, falsification and misrepresentation in the books and financial statements of the company which contained false and inflated current account bank balances, fixed deposit balances, fictitious interest from sales and that auditing could have been done with more care and prudence.
"We find that there is no direct evidence to show that the engagement partners or audit firms or other PwC firms were directly involved in the fraud. The auditor is not required to perform the functions of a detective. The auditor is a watchdog and not a blood-hound. The duty of an auditor is verification and not detection," SAT said.
And that if there was any dereliction of duty, it was on the part of the two partners for which the other 10 firms cannot be banned just because they have some resource sharing agreements, the tribunal said.
However, SAT said there has been breach of duty, therefore, the entire fee of Rs 13 crore can be taken back with interest from PwC.
Stating that since Sebi is expected to take only corrective or remedial measures, the two year ban on PW and other associated firms violates this. Also to consider the ban as a remedial action is farfetched and cannot be accepted as Sebi ban is "blatantly erroneous" SAT observed.
Following the Satyam Computer scam, Sebi had began a probe in 2009 and the ICAI had cancelled memberships of the two PW partners involved in the fraud and imposed Rs 5 lakh each fine them.
On January 11, 2018, on completion of the probe, Sebi had ordered a two-year ban on PW and it parent and affiliates for two years from carrying out auditing of any listed firms, and also ordered disgorgement of over Rs 13 crore of wrongful gains from PwC and two ex-partners who worked on Satyam.
The 108-page Sebi order came nine years after the scam came out and after two failed attempts by PwC to settle the case through the consent mechanism. This is also one of the most stringent orders passed by any regulator against a Big Four auditor.
On the disgorgement order, Sebi said Price Waterhouse Bangalore and its two erstwhile partners S Gopalakrishnan and Srinivas Talluri to jointly payback the wrongful gains of Rs 13.09 crore with an annual interest of 12 percent from January 7, 2009 till the date of payment" and pay up within 45 days.
Gopalakrishnan and Talluri were also restrained from issuing any certificates Sebi for three years.
After consent pleas were rejected, PwC challenged in the Supreme Court questioning the Sebi jurisdiction over auditors but did not get much benefit.
The SAT also noted that a majority of the current partners of the ten PwC firms became partners only after 2009. As on the date of the impugned order, of the 98 partners in the 10 PwC firms, 70 are new partners who were not PwC partners during 2000-09. Thus banning them merely because they are presently partners in PW firm is in complete violation of Section 31(2) of the Partnership Act.
Noting that Sebi has made only a, "feeble written submission" to establish its arguments to the effect that the Sebi Act is a standalone statute and the direction issued under it cannot be tested on the basis of other Acts.
"It was asserted that securities fraud is unique and must be viewed in the context of the securities market and innocent investors which cannot be rectified by resorting to conventional and old laws. Such submissions show bankruptcy of ideas," SAT said.
PwC refused to comment on the development.
Vishesh Chandiok of peer firm Grant Thornton said the SAT order means 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.
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