[The following update has been brought to you by Saumya Raizada, who is an Editor at IRCCL.]
The Securities Appellate Tribunal (SAT), has quashed the 2018 Securities Exchange Board of India (SEBI) order which disentitled PWC from providing a certificate of audit of listed companies, compliance of obligations of listed companies and intermediaries registered with the regulator for a period of two years because of the role of their auditors in the Satyam fiasco. SEBI in its earlier decision had ruled that PWC Bangalore and two of their erstwhile partners were negligent in conforming to the auditing standards prescribed by the Institute of Chartered Accountants of India (ICAI) as a result of which a major scam in the form of falsified accounts of Satyam Computer Services could take place. SEBI fastened the liability of negligence on the whole of the PWC network along with two individual auditors who were directly in charge of the accounts. Apart from the ban, a heavy fine of INR 13.09 crores was also imposed on them. However, the latest SAT order has reduced most portions of the earlier order to a nullity, and PWC and the other auditors have been allowed to continue the audit of listed companies in the country.
The major findings of the order are set out below:
SEBI’s jurisdiction carved out by SAT
SAT in its 125-page decision has made it clear that the right of banning an auditing firm rests with the ICAI and not the SEBI and that the latter could not take punitive measures since its duties were limited to the performance of securities market regulation and development only. It was also added that in furtherance of such a duty, the SEBI could pass a remedial direction but not a preventive one against a person associated with the securities market.
A resource sharing agreement does not automatically transfer liabilities
The ruling also clarified that merely because some audit firms have a resource-sharing agreement between them would not be enough to hold them liable for an act which they did not know was being committed by another auditing firm without their knowledge. SAT has severely criticized the Whole Time Member’s conclusion of a ‘networking arrangement’ being present between the parties because of a resource-sharing agreement, holding that the finding suffered from a lack of evidence. It noted that for the fault of 2 directors, 10 firms could not be punished only because they had a resource-sharing agreement between them.
Demarcation of liability in case of default by a director
The order further clarifies that misconduct committed by a director in one entity cannot make the other firms liable wherein the same person serves as a director.
Order of SEBI disgorging the amount of fine upheld by the SAT
Although the SAT has largely quashed the earlier order by the SEBI, the fine imposed (coupled with an interest) earlier on two of their auditors has been upheld by it on account of “professional lapse and negligence” exercised by them with respect to the accounts.
The present order comes as a relief to the present employees and management of PWC, who had no role to play in the dereliction of duty done by some of their partners and also sheds light on the oft-debated jurisdiction of the SEBI. The SAT has also debarred the auditors alleged to have sided with Satyam Computers for pulling off a scam for the lack of evidence constituting the requisite standard of “mens-rea” to hold them accountable for an “offence” of fabrication and falsification of accounts done by the top management at Satyam Computers. However, the SEBI may also decide to appeal the decision before the Supreme Court of India so it might take some more time for the dust to finally settle in.