2023 (6) TMI 1337 - Board - SEBI

Professional misconduct of statutory Auditors - Forensic Audit Report shows irregularities in financial statements apparently showing profits through inflated sales and non-existent purchases and sales noticed by SEBI - allegation of books of accounts of ARL were manipulated - Allegation of price and trade movement in the scrip of ARL - v iolations of various provisions of SEBI Act, 1992 and PFUTP Regulations 2003 - as per SEBI Noticees being statutory auditors had been conspiring with the management and/or were knowingly negligent in their job so as to facilitate the Company in defrauding the shareholders and investors - HELD THAT - There is no dispute to the finding that the Noticees were instrumental in preparing accounts of ARL.We find that there are strong evidences in this matter available on records to point out that there has been gross negligence and dereliction of duty on the part of Noticees. However, at the same time we can turned a blind eye to the fact that the Noticees had issued a Qualified Report highlighting certain irregularities in the financials of the Company that were taken up for limited review for the quarter ended 31-12-2014. The instances of being unprofessional or being negligence would be difficult to equate with committing fraud in connivance with the management, where evidences are not sufficient to demonstrate that the Noticees had actually manipulated the books of accounts with knowledge and fraudulent intention. In the absence of any tangible evidence, the question of fraud committed by the them would be difficult to survive and therefore in the absence of any material to establish knowledge/collusion/connivance of the Noticees with such fraudulent scheme, the Noticee cannot be brought under disciplinary/penal jurisdiction of SEBI. With respect to any possible connivance or collusion by the Noticees with the Company or its management, it is acknowledged that, in such matter it is very difficult to find out either a written agreement or such agreement of minds and the same has to be culled out from the acts of the parties. However, there has to be some evidence to support such meeting of minds before attributing to the Noticees of actively colluding with the Company. In the present matter, we don t find sufficient evidence from the record to make an assertive statement that there was an agreement or understanding suggesting that the Noticees were acting in connivance and collusion with the Company or its management in executing their fraudulent scheme. However, at the same time, while dealing with the submission of the Noticees for being granted exoneration based on the observations in the peer review conducted by the ICAI, it may be stated that primary objective of peer review is not to find out deficiencies but to improve the quality of services rendered by members of the profession. Under the circumstances, while granting benefit of doubt to the Noticees with respect to alleged commission of fraud by the Noticees, it would sufficient that to meet the end of justice so as to address the gross negligence and sheer professional misconduct as displayed by the Noticees as the Statutory Auditor of the Company which has been deliberated and established beyond doubt in the preceding paragraphs, the instant proceedings are disposed of with the following directions. Directions - We find that the materials brought forth in the Investigation while propounding the allegation against the Noticees herein, lack the tenacity to withstand legal scrutiny required in the matter pertaining to violation of the PFUTP Regulations, 2003 or suchlike. Accordingly, we are constrained to dispose of the present proceedings qua the Noticees with a cautionary advice to be careful while dealing in the securities market. However, looking at the glaring misconduct and dereliction of duties and abhorrence of due diligence while conducting statutory audit as glaringly displayed by the Noticees, it is directed that a certified copy of this order be forwarded to ICAI and NFRA for appropriate action, if any, as deemed fit at their end.

Summary

Issues Involved:
1. Manipulation of financial statements by ARL.
2. Role of statutory auditors in the manipulation.
3. SEBI's jurisdiction and actions against the statutory auditors.

Summary:

Issue 1: Manipulation of Financial Statements by ARL

SEBI received a forensic audit report from Punjab National Bank highlighting irregularities in ARL's financial statements, showing inflated sales and non-existent purchases. SEBI's preliminary examination revealed that ARL conducted transactions with controlled entities without actual movement of goods, prepared different sets of financial statements for FYs 2011-2013, and posted inflated figures in annual reports. The transactions with controlled entities were circuitous, indicating manipulation of sales and profits. Statutory auditors failed to detect these manipulations, resulting in shareholders being misled.

Issue 2: Role of Statutory Auditors in the Manipulation

The statutory auditors, M/s Doshi, Chatterjee, Bagri & Co. LLP (DCB), and R.K. Bagri, were alleged to have been negligent and failed to maintain professional standards. They did not adhere to the basic auditing procedures, such as sending confirmation letters to debtors, which would have revealed the fictitious nature of the transactions. The auditors were accused of aiding ARL in projecting untrue financial statements. The investigation found that the auditors failed to exercise professional skepticism and did not question the nature of circular transactions, thus facilitating the manipulation of financial statements.

Issue 3: SEBI's Jurisdiction and Actions Against the Statutory Auditors

SEBI issued a show cause notice to the auditors, asking why suitable directions/prohibitions should not be imposed against them. The auditors contended that SEBI lacked jurisdiction and that the delay in proceedings vitiated the case. They argued that forensic audits and statutory audits have different scopes and methodologies. Despite the auditors highlighting certain irregularities in a limited review report for the quarter ending December 31, 2014, SEBI found that the auditors were grossly negligent and derelict in their duties. However, SEBI acknowledged the lack of sufficient evidence to prove connivance or collusion with ARL's management.

Findings and Directions:

SEBI concluded that while there was gross negligence and professional misconduct by the auditors, there was insufficient evidence to prove their collusion with ARL's management. Consequently, SEBI disposed of the proceedings with a cautionary advice to the auditors to be careful while dealing in the securities market. SEBI directed that a certified copy of the order be forwarded to ICAI and NFRA for appropriate action. The order came into immediate effect, and copies were served to relevant parties for compliance.