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2023 (12) TMI 318 - AT - SEBIPower of SEBI to initiation action against Chartered Accountant (CA) / Auditor of the company - Charge of conspiracy and involvement in the fraud against CA firm - statutory auditor working against the fiduciary capacity - appellant is a leading firm of Chartered Accountants consisting of 14 partners and 250 accountants, article assistants and others - appellant was appointed as the joint statutory auditor - appellant had acted against the fiduciary capacity and instead of working in the interest of the shareholders of the company the appellant facilitated the scheme of cleaning up the books of account of the Company despite being aware of the irregularities and misstatements in the financial statements of the Company - investigation report alleged that on the basis of the hand written note the appellant had facilitated the scheme of cleaning up of the books of the Company and therefore recommended initiation of adjudication proceedings. Accordingly, adjudication proceedings were initiated against the appellant under Section 15HA of the SEBI Act - Whether appellant was not involved in the fudging of the books of accounts? HELD THAT - In Price Waterhouse Co. Vs. SEBI 2019 (9) TMI 592 - SECURITIES APPELLATE TRIBUNAL, MUMBAI this Tribunal while considering the role of the appellant as a firm of the C.A.s found that the scope of the enquiry was only restricted to the charge of conspiracy and involvement in the fraud and not to any charge of professional negligence since the C.A. / C.A. firm were not dealing directly in the securities. This Tribunal held that in absence of inducement, fraud was not proved nor there was connivance or collusion by the C.A.s and therefore, the provision of section 12 (A) of SEBI Act and Regulation 3 4 of PFUTP Regulations are not applicable. This Tribunal held that gross negligence or recklessness in adhering to the accounting norms in the course of auditing can only point out to the professional negligence which would amount to a misconduct to be taken up only by ICAI. Once an investigation or a finding in the inquiry comes that the appellant was not involved in the fudging of the books of accounts and that there was no collusion or connivance by the appellant as a statutory auditor with any employee, promoter or director of the Company then the matter has to be dropped and SEBI could not proceed any further. The scope of inquiry was only restricted to the charge of conspiracy and involvement in the fraud and not to any charge of professional negligence since the chartered accountant or chartered accountant firm were not dealing directly in the securities. Considering the aforesaid the show cause notice only alleged that the appellant had facilitated the scheme of cleaning up of the books of accounts of the Company. There is no finding of the appellant s direct involvement in the cleaning up of the books of accounts or in the fudging of the books of accounts of the Company. There is also no finding of the appellant s collusion or connivance with any director, promoter or employee of the Company and consequently the appellant cannot be charged under Section 12A of the SEBI Act read with Regulation 3 and 4 of the PFUTP Regulations. While conducting the statutory audit of a company, one of the objectives of an auditor is to identify and assess the risks of material misstatement, whether due to fraud or error, at the financial statement and assertion levels. For this purpose, the relevant standard is the Standard of Auditing ( SA ) 315 titled identifying and Assessing the Risk of Material Misstatement Through Understanding the entity and its Environment . As per the said standard, identification of risk of material misstatement is a matter of professional judgement. In the context of SA-315 pertaining to identifying and assessing the risks of material misstatements in financial assessment, it is pertinent to bear in mind that any audit is subject to inherent limitations and that owing to such inherent limitations of an audit, there is an unavoidable risk that some material misstatement of the financial statements may not be detected even though the audit is properly planned and performed in accordance with the SA s which was also stated by the appellant in the engagement letters executed with CG Power. Risk of not detecting a misstatement resulting from fraud is higher than the risk of not detecting a misstatement resulting from an error. Similarly, the risk of not detecting a material misstatement resulting from management fraud is greater than that resulting from an employee fraud. The standard of accountancy framed by the ICAI makes a distinction between a statutory auditor and a forensic auditor. We may state here that the role of a statutory auditor is not to function like a forensic auditor. Any statutory audit unlike an internal or forensic audit is inherently carried out on a test check / sampling basis which in the instant case had been done by the appellant. As part of the audit process the appellant had duly carried out the exercise of identifying and assessing the risk of material misstatements in the financial statements in accordance with SA 315. Accordingly, in its professional judgement and after exercising reasonable professional skepticism, ledger accounts with zero balance in the advance to suppliers / advance from customer account were not identified as those which were subject to risk of material misstatement since zero balances would not have impacted the financial statements and therefore, were not considered for further audit procedures. Conversely, those accounts which had a closing balance in advance to suppliers / advance from customer account were considered for further audit procedures such as obtaining balance confirmation, verification of underlying service agreements and supply contracts etc. Further, any statutory audit, unlike an internal or a forensic audit, is inherently carried out on a test-check / sampling basis, which was done by the appellant in the case of CG Power also. We are of the view that if the appellant had not carried out the statutory audit as per the accounting standards framed by the ICAI and in the event the appellant could not have resigned without filing the complete audit report or had failed to consider the netting of amount transferred as loans to Action and Avantha then it was open for SEBI to refer to the ICAI to take disciplinary action against the appellant for violation of the accounting standards. SEBI s role was limited and confined to the conspiracy charge against the appellant with regard to fudging of the accounts of the Company. The impugned order cannot be sustained and is quashed. The appeal is allowed.
Issues Involved:
1. Alleged violation of Section 12A(a), (b), and (c) of the SEBI Act, 1992 read with Regulations 3(b), (c), and (d), 4(1), and 4(2)(f) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003. 2. The role and knowledge of the appellant regarding the transactions involving Nashik Property and Kanjurmarg Property. 3. The jurisdiction and scope of SEBI's inquiry into the conduct of Chartered Accountants. 4. The professional standards and responsibilities of statutory auditors versus forensic auditors. Summary: 1. Alleged Violation of SEBI Act and PFUTP Regulations: The appellant, a leading firm of Chartered Accountants, was penalized by SEBI for allegedly violating Section 12A(a), (b), and (c) of the SEBI Act, 1992, and Regulations 3(b), (c), and (d), 4(1), and 4(2)(f) of the PFUTP Regulations. The AO concluded that the appellant facilitated the cleaning up of the books of the Company despite being aware of irregularities and misstatements in the financial statements. 2. Role and Knowledge of the Appellant: The AO found that the transactions involving Nashik Property and Kanjurmarg Property, which included significant sums of money, were not reflected in the financial statements. Despite the AO's findings, the Tribunal noted that there was no documented evidence of these transactions and that the appellant was not aware of them. The Tribunal emphasized that the appellant was a statutory auditor, not a forensic auditor, and relied on the documents provided by the Company, which did not indicate any irregularities. 3. Jurisdiction and Scope of SEBI's Inquiry: The Tribunal highlighted the limited scope of SEBI's inquiry, which should be confined to the charge of conspiracy and involvement in fraud. The Tribunal referenced the Bombay High Court's decision in Price Waterhouse & Co. vs. SEBI, which stated that SEBI cannot encroach upon the powers vested with the Institute under the CA Act. SEBI can only take action if there is evidence of connivance or conspiracy with the Company's officers. 4. Professional Standards and Responsibilities: The Tribunal noted the distinction between statutory auditors and forensic auditors, emphasizing that statutory audits are conducted on a test-check basis and are subject to inherent limitations. The appellant had followed the accounting standards prescribed by the ICAI, and there was no evidence of their involvement in fabricating or falsifying accounts. The Tribunal concluded that any issues of professional negligence should be referred to the ICAI, not SEBI. Conclusion: The Tribunal found that the AO's findings were based on presumptions and conjectures. There was no evidence of the appellant's direct involvement in the fraudulent transactions or any collusion with the Company's directors or promoters. Consequently, the impugned order was quashed, and the appeal was allowed.
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