2022 (11) TMI 1430 - AT - SEBI

Power of SEBI to initiation action against Chartered Accountant (CA) / Auditor of the company - Default by Auditor - negligence in certification of accounts of listed companies and lack of professionalism - Criminal case against the Company for cheating banks on the basis of manipulated financial credentials - auditor of company restrained directly or indirectly from issuing any certificate related to audit of listed companies, compliance obligations of listed companies and intermediaries registered with SEBI - charge against company as executive directors have colluded in ensuring that the Company s financials were misstated thereby defrauding investors and that the directors were responsible for the affairs of the Company - allegation against the auditor / appellant was that the said noticee was responsible for negligence in certification of accounts of listed companies and lack of professionalism skepticism in audit and therefore alleged that all the noticees including the appellant were engaged in dubious accounting practices to defraud the investors by manipulating the financial statements thereby violating the provisions of Section 12A(a), (b) (c) of the SEBI Act read with Regulation 3 and 4 of the SEBI - PFUTP Regulations - allegation against the appellant was that it colluded with noticee nos. 2 and 8 being CMD and Director (Finance) (ED) respectively HELD THAT - As finding of the WTM that the appellant had colluded with noticee nos. 2 and 8 in the fraud perpetuated by the Company and manipulated financial statements of the Company is patently erroneous based on surmises and conjectures and is also perverse. The charge is, that directors have colluded in ensuring that Company s financials are misstated. The charge against the appellant that it was not only negligent in the certification of accounts but was also engaged in dubious accounting practices to defraud the investors by manipulating the financial statements. This charge of manipulating the financial statements by colluding noticee nos. 2 and 8 was required to be proved by the respondent SEBI. Merely by holding that the appellant did not raise any query with regard to the transfer of funds and failure on the part of the appellant to raise red flags with respect to instances of fake transactions may show negligence on the part of the appellant but cannot amount to collusion between the Company and the appellant or between the appellant and noticee nos. 2 and 8 nor can it lead to a conclusion that the appellant was involved in the manipulation of the accounts of the Company. The charge in the show cause notice is, that the appellant has colluded with the directors, namely, noticee nos. 2 to 9 and not with the Company. There is no finding given in the impugned order of any collusion between the appellant with noticee nos. 2 and 8 or between noticee nos. 2 to 9. The finding that the appellant had colluded with noticee nos. 2 and 8 to commit fraud is patently erroneous and is based on surmises and conjectures. Penalizing the appellant on the charge that the appellant was colluding with noticee nos. 2 and 8 is patently erroneous and cannot be sustained. However, we find that the Disciplinary Committee of the Institute of Chartered Accountants of India (ICAI) found that appellant guilty of issuing an incorrect certificate dated June 4, 2009 certifying that BBIL had incurred capital expenditure for a sum of Rs. 90.49 crore as on March 31, 2009 which was variance to the figures shown in Schedule (V) of the balance sheet. The Disciplinary Committee observed that the appellant did not exercise due diligence while certifying the certificate in respect of capital expenditure and observed that the appellant was guilty of professional misconduct within the meaning of Clause (7) and (8) of Part I of Second Schedule to the Chartered Accountants Act, 1949 and consequently reprimanded the appellant. Though the WTM observed that the disciplinary proceedings has no bearing to the outcome of the proceedings involved, we are of the opinion, that these proceedings have a material bearing which has to be taken into consideration. The finding given by the Disciplinary Committee is, that the appellant was guilty of professional misconduct and that it did not exercise due diligence while certifying the certificate in respect of capital expenditure. For such incorrect issuance of certificate the investors could be misled and SEBI was well within its right to penalize the appellant. Consequently, even though falsification of the certificate has not been taken into consideration, we are of the opinion that in the given facts and circumstances, the appellant is liable to be penalized for certifying an incorrect statement of the capital expenditure. Direction of the WTM restraining the appellant from issuing any certificate related to audit of listed companies etc. is reduced from one (1) year to three (3) months. The appeal is partly allowed.

Summary

Issues:
1. Restraint on auditor from issuing certificates related to audit of listed companies.
2. Allegations of collusion and negligence against the auditor.
3. Findings of the Whole Time Member (WTM) of SEBI.
4. Applicability of previous judgments on collusion and due diligence.
5. Disciplinary action by the Institute of Chartered Accountants of India (ICAI) against the auditor.
6. Reduction of the restraint period imposed on the auditor.

Analysis:
1. The appellant, an auditor of a company, challenged SEBI's direction restraining them from issuing audit-related certificates for one year. The basis was allegations of collusion and negligence in certifying accounts leading to fraud. SEBI's investigation revealed financial manipulation by the company's directors, implicating the appellant for lack of professional skepticism in audit practices.

2. The WTM found the appellant colluded with company directors in fabricating financial statements, failing to raise red flags on fake transactions. However, the Tribunal deemed these findings erroneous, emphasizing the need for proof of collusion beyond negligence. The charge was against specific directors, not the company itself, highlighting the lack of evidence on collusion with the implicated directors.

3. Citing precedents, the Tribunal emphasized the necessity of material evidence to establish collusion. Lack of due diligence by the appellant, though a professional misconduct, did not prove collusion with the fraudulent activities of the company. The ICAI's disciplinary action against the appellant for issuing an incorrect certificate was considered, indicating professional negligence but not collusion.

4. The Tribunal acknowledged the ICAI's findings of professional misconduct by the appellant but reduced the restraint period from one year to three months. While the falsification of the certificate was not directly considered, the appellant was held liable for certifying incorrect information, impacting investors and justifying SEBI's penalty.

5. Ultimately, the Tribunal partially allowed the appeal, considering the ICAI's disciplinary action alongside SEBI's findings. The reduction in the restraint period reflected a balanced approach, acknowledging professional negligence while rejecting the allegations of collusion based on conjectures and surmises.