Auditor’s professional lapses not fraud

By Karthik Somasundram and Sneha Jaisingh, Bharucha & Partners
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In January 2018, the Securities and Exchange Board of India (SEBI) banned the accountancy firm Price Waterhouse (PW) from auditing listed companies for a period of two years due to lapses in the audit of Satyam Computer Services Limited (Satyam). The order was successfully challenged in the Securities Appellate Tribunal (SAT), (Price Waterhouse & Co. & ors. v SEBI).

In January 2009, the chairman of Satyam disclosed that audited statements were inflated and showed non-existent cash and bank balances. SEBI investigated and accused PW of gross negligence and recklessness in conducting the audit. It issued show cause notices (SCN) in 2009 and 2010, under the SEBI Act and SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (PFUTP regulations). The SCNs were challenged in the Bombay High Court on the grounds that SEBI was exceeding its powers and usurping the jurisdiction of the Institute of Chartered Accountants of India (ICAI).

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Karthik Somasundram
Partner
Bharucha & Partners

In August 2013, the court disagreed with PW but ruled that SEBI could not encroach upon the powers of ICAI. SEBI could only pass orders against PW where the facts of falsifying and fabricating accounts were established. The court restricted the enquiry by SEBI to the charges of conspiracy and involvement of PW in perpetrating fraud, and excluded the allegations of professional negligence.

In January 2018, after further enquiry SEBI concluded that the failure to seek external confirmation of bank balances and fixed deposits, and a failure to detect fake invoices because PW had not adopted the rigorous procedures laid down by the ICAI, meant that the grounds of gross negligence and involvement in the forging of Satyam’s accounts, were established. SEBI held that gross negligence amounted to the commission of fraud for the purposes of PFUTP regulations. PW was sanctioned as above and 10 other accounting firms associated with PW were also banned. PW challenged the orders in the SAT.

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Karthik Somasundram is a partner and Sneha Jaisingh is a managing associate at Bharucha & Partners.

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