The Securities Appellate Tribunal (SAT) has set aside an order by Sebi imposing penalty on a partnership firm and its chartered accountant (appellants) in a matter involving wrongful utilisation of IPO proceeds.
The tribunal, in its order on October 12, said the Sebi Act is not applicable to the appellants who were statutory auditors of Tarini International, as they were not dealing in securities and that only ICAI had the authority to take action against them.
The order effectively reinforces the stand that Sebi can act against auditors only if they are actively engaged in the financial or accounting fraud, and not for false reporting or certification and gross negligence, which come under the domain of other regulators such as the Institute of Chartered Accountants of India (ICAI) or NFRA.
“The essence of the case is whether statutory auditor of a company is a party in preparation of manipulated or fabricated financial statements. If the answer to the said question is affirmative, then Sebi has necessary powers under the SEBI Act, 1992; otherwise not. If Sebi finds that the auditor had no intention and knowledge to fabricate books of accounts, then it cannot give any further directions,” said Gaurav Pingle, a practising company secretary.
The finding in this case largely echoes what the Bombay High Court had said in the matter of Price Waterhouse Co. versus Sebi back in 2010. The
Bombay High Court had held that while exercising the powers under the Sebi Act, it is not open to Sebi to encroach upon powers vested with the institute under the Chartered Accountant Act, 1949.
“In absence of inducement, fraud, connivance or collusion by CAs, the provision of Section 12 (A) of SEBI Act and Regulation 3 and 4 of PFUTP Regulations are not applicable. Gross negligence or recklessness in adhering to the accounting norms in the course of auditing can only indicate professional negligence amounting to a misconduct and the jurisdiction to address such misconduct is with ICAI, and not SEBI. This will pretty much be the yardstick going forward in so far as the role of CAs is concerned,” said Nirav Shah, partner, DSK Legal.
However, in the event that Sebi has material on record to suggest that the CA has been instrumental in preparing false and fabricated accounts in connivance with the company or promoters of the company, the regulator would be entitled to pass appropriate orders under section 11(4) of the SEBI Act and pass directions under section 11-B of the Sebi Act, added Shah.
“This limitation of powers has been extended even under company law by a ruling of the NCLAT. This does help in avoiding multiple actions by different regulators and ensures that the expert body which understands the technicalities of the audit process is authorised to act. Further, there is a clear divide between where Sebi (frauds, and the like) and ICAI (gross negligence, not complying with auditing standards, etc) can act,” said Jayant Thakur, a chartered accountant.
The present case
It was found that the appellants had falsely certified utilization of IPO proceeds by issuing an unqualified utilization certificate, thereby aiding and abetting the company (Tarini International) in disseminating false financial position to investors.
The issue to be examined, however, was whether the appellants can be penalised under Section 12A of SEBI Act, 1992 and various other PFUTP regulations.
SAT, in its order on October 12, observed that there was no finding to suggest that the appellants were party to preparation of false and fabricated accounts or had manipulated the books of accounts or had colluded with the company in any way.
“In absence of a finding that there was deceit or inducement, the appellants can only be held guilty for professional lapse or negligence for which the appropriate authority to take action is ICAI. Sebi has already made a complaint to the ICAI in the instant case and ICAI is holding an inquiry against the appellants,” the tribunal said.