2022 (2) TMI 1408 - AT - SEBI

Power of SEBI statutory initiating action against statutory auditor / chartered accountant - appellant who is a statutory auditor / chartered accountant has been prohibited from issuing any certificate of audit and has been restrained from rendering any other auditing services to any listed companies and intermediaries for a period of one year - as alleged company had made wrong misleading or inadequate disclosures to the stock exchange and had understated the outstanding loans and interest and financial changes in the annual returns of 2008-09, 2009-10 and 2010-11 and had violated Section 12A of the SEBI Act read with Regulations 3 and 4 of the PFUTP Regulations. The stand of the appellant is, that the preparation and presentation of the financial statement and the job to ensure that they are free from material misstatement whether due to fraud or error is the responsibility of the management. The appellant as a statutory auditor was responsible to express an opinion on the financial statement based on the internal audit and was not involved in the preparation of the books of accounts of the company or the misstatement in the balance sheet by the company. HELD THAT - In the instant case, the show cause notice alleged that the company did not utilize the IPO proceeds and that it was diverted to different entities in the guise of making payments towards the objects stated in the prospectus. The focus in the show cause notice was to examine the role of the appellant as the statutory auditor with regard to due diligence done by it by certifying the expenditure incurred by the company towards the IPO expenses out of the IPO proceeds. The appellants certified the amount was utilized as per the prospectus. A.O. however found that there were lapses on the part of the appellant and due diligence was not carried out by them while certifying that the IPO proceeds were utilized for the objects stated in the prospectus. We find that the A.O. has only found that due diligence was not carried out by the appellant. There is no finding that the appellants were instrumental in preparing false and fabricated accounts or have connived in preparation or falsification of the books of account. There is no finding that the appellants had manipulated the books of accounts with knowledge and intention, in the absence of which, there is no deceit or inducement by the appellants. In the absence of any inducement, the question of fraud committed by the appellants does not arise. This Tribunal in Price Waterhouse (supra) has categorically held that a C.A. can be proceeded against them if they are instrumental in preparing false and fabricated accounts otherwise SEBI has no power to proceed against them. Section 12A(a) (b) of the SEBI Act is obviously not applicable to the appellant as they are not dealing in the securities. Similarly, Section 12(c) cannot be made applicable because no fraud has been carried out by the appellant. Further, in the absence of connivance, deceit, or manipulation Regulation 3 4 of the PFUTP Regulations cannot be made applicable. Thus when a specific finding has been given by the WTM in the impugned order that the promoters and the directors of the DCHL had a private and discreet arrangement between the company and DCM which was only known to the promoters and directors of the DCHL with regard to the understatement of loans and liabilities in the annual accounts of DCHL, it is clear that the appellant as a statutory auditor was not responsible for the preparation and falsification of the books of accounts, the financials of the company and the balance sheet of the company. Thus in order to give a finding on collusion, there must be some material which could lead to an inference of collusion. Once a finding is given that the appellant was not involved in the fabrication and fudging of the books of accounts and the balance sheet and if the appellant had no intention or knowledge of such understatement being shown in the financials, the charge of fraud or collusion or connivance with the directors and promoters of the company cannot be levied, only on the ground that he was not diligent or cautious or did not check the outstanding loan details from the banks and through other sources. Lack of due diligence can only lead to professional negligence which would amount to a misconduct which could be taken up only by ICAI. Thus the impugned order in so far as it relates to the appellant cannot be sustained and is quashed. The appeal is allowed with no order as to costs.

Summary

Issues:
1. Appeal against SEBI order prohibiting a statutory auditor from issuing audit certificates.
2. Allegations of understating loans and financial manipulation by a listed company.
3. Violation of SEBI Act and PFUTP Regulations by the appellant.
4. Examination of the statutory auditor's responsibilities and due diligence.
5. Comparison with previous judgments regarding SEBI's jurisdiction over chartered accountants.

Analysis:
1. The appeal challenged SEBI's order prohibiting the appellant, a statutory auditor, from issuing audit certificates to listed companies due to allegations of understating loans and financial manipulation by a listed company. SEBI's order was based on violations of SEBI Act and PFUTP Regulations.

2. The investigation revealed that the listed company had understated loans and financial changes, leading to misleading disclosures. The Whole Time Member (WTM) found that the promoters and directors were involved in discreet arrangements causing understatement, keeping shareholders uninformed.

3. The WTM concluded that the appellant, as a statutory auditor, failed in his duty to report accurately, overlooked reporting of outstanding loans, and did not adhere to auditing standards, potentially colluding with the company. The appellant's lack of due diligence was highlighted as a violation of auditing standards.

4. The appellant argued that the responsibility for financial statements' accuracy lies with the company's management, not the statutory auditor. They claimed that the issue of non-disclosure of loans was noticed during the audit for the financial year 2011-12, implying no prior knowledge.

5. Referring to previous judgments, the Tribunal analyzed SEBI's jurisdiction over chartered accountants. It was established that SEBI can act against C.A.s if they are involved in fabricating accounts, not merely for professional negligence. Lack of evidence of fraud or collusion absolved the appellant from SEBI's charges.

6. Ultimately, the Tribunal quashed SEBI's order against the appellant, citing lack of evidence of collusion or fraud. The decision emphasized that professional negligence falls under ICAI's purview, not SEBI's, and highlighted the need for concrete evidence to establish collusion.

7. The detailed analysis of the case, comparison with previous judgments, and the Tribunal's decision to allow the appeal provide a comprehensive overview of the legal proceedings and the considerations involved in this matter.