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TMI Blog2023 (12) TMI 318X X X X Extracts X X X X X X X X Extracts X X X X ..... fore 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 inquir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sible for auditing the corporate accounts of the Company. A joint audit report was prepared and filed for the financial year 2016-17. Subsequently, for the financial year 2017-18 the statutory auditor M/s. Sharp Tannan was relieved as joint statutory auditor on account of mandatory rotation under the Companies Act and therefore the appellant became the sole statutory auditor for the financial year 2017-18. While carrying out review of the accounts of the Company as per the accounting standards prescribed by the Institute of Chartered Accountants of India ( ICAI for short), the appellant received a letter from the Company on April 26, 2018 indicating that they were in the process of appointing another auditor as their sole statutory auditor. On this basis, the appellant resigned as the statutory auditor with immediate effect vide their letter dated April 27, 2018. 3. The Company made a corporate announcement on August 20, 2019 disclosing the outcome of the board meeting dated August 19, 2019 indicating that the liabilities of the company and the CG Group as a whole as well as advances to related and unrelated parties of the company and the group might have been potentially und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n being that the liability (i.e. the advance received from Blue Garden) was netted off against the asset (i.e., the advances given to Avantha and / or Action). 5. Upon an examination of this investigating report SEBI passed an ad interim order dated September 17, 2019 restraining the promoters and directors of the Company from accessing the securities market as well as from being associated with any intermediaries registered with SEBI or any listed entity. The said interim order was subsequently confirmed on March 11, 2020. 6. In the meanwhile, the Company furnished certain documents to SEBI and one such document was a photo copy of hand written note dated January 16, 2018 purportedly written by Mr. V.R. Venkatesh who was then CFO of the Company. In this hand written note it was alleged that the clean-up of the books of the Company was proposed to be carried out pursuant to a discussion with M/s. Gagan Chaturvedi. Subsequently the Bombay Stock Exchange appointed MSA Probe Consulting Private Limited for conducting a forensic audit of the books of the accounts of the Company. MSA Probe Consulting Private Limited submitted a forensic audit report on March 18, 2020 and did not c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rused the balance confirmation given by Blue Garden and therefore the appellant had examined the said transaction but did not examine the irregularities that was brought out in the audit report and therefore the appellant had facilitated the Company to make such entries in the books of accounts and hence the appellant was aware of the transaction relating to Nashik Property and Kanjurmarg Property. 9. The AO came to the conclusion that the appellant being the statutory auditor despite being aware of the irregularities certified the financial statements of the Company as true and fair which therefore shows the appellant s direct involvement on such misstatements of the Company. The AO, thus, held that the appellant had acted against the fiduciary capacity and instead of working in the interest of the shareholders of the Company had facilitated the scheme of cleaning up the books of accounts of the Company despite being aware of irregularities and misstatements in the financial statements of the Company. 10. We have heard Shri Vikram Nankani, the learned senior counsel with Shri Nikhil Kumar Rungta, the learned counsel for the appellant and Shri Mustafa Doctor, the learned seni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tched with the books of accounts of the Company. Thus, merely by considering the advance payment made by the Company to Blue Garden towards Rs. 28 crore and considering the balance confirmation given by Blue Garden does not mean nor does it prove that the appellant became aware of the transactions relating to Nashik Property and Kanjurmarg Property involving receipt of Rs. 390 crore by the Company from Blue Garden nor does it prove that the Company had advanced Rs. 245 crore and Rs. 145 crore by the Company to Action and Avantha. 16. We are of the opinion that since the receipt of funds through the transactions of sale of Nashik Property and Kanjurmarg Property was not known to the appellant as there was no written documentation nor was the advances given by the Company was known as there was no written documents the finding that the appellant must have been aware of the transaction is purely based on surmises and conjectures. Consequently, the finding that being aware of these transactions the appellant having not examined these transactions and the irregularities that was brought out in the audit report cannot lead to any finding that the appellant had facilitated the Company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and to regulate the securities market by such measures as it thinks fit. It is true, as argued by the learned counsel for the petitioners, that while exercising powers under the Act, it is not open to the SEBI to encroach upon the powers vested with the Institute under the CA Act. However, it is required to be examined as to whether in substance by initiating the proceedings under the SEBI Act, the SEBI is trying to overreach or encroach upon the powers conferred under the CA Act. In this connection, it is required to be noted that the SEBI has powers under the Act and the Regulation to take remedial measures in connection with safeguarding the interest of investors and regulate the securities market. Under Section 11 of the SEBI Act, the SEBI has power to prohibit fraudulent and unfair trade practices relating to securities market. Under Section 11 (4) of the SEBI Act, the SEBI is entitled to pass appropriate orders in the interest of investors or securities market and is entitled to take measures as prescribed in the said Section. Under Section 11 B, powers have been conferred on the SEBI to give appropriate directions even to any person or class of persons referred to in Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eholders and are required to give a correct picture of the financial affairs of the Company. It is not uncommon nowadays that for financial gains even small investors are investing money in the share market. Mr. Ravi Kadam has rightly pointed out that there are cases where even retired persons are investing their retiral dues in the purchase of shares and ultimately if such a person is defrauded, he will be totally ruined and may be put in a situation where his life savings are wiped out. With a view to safeguard the interests of such investors, in our view, it is the duty of the SEBI to see that maximum care is required to be taken to protect the interest of such investors so that they may not be subjected to any fraud or cheating in the matter of their investments in the securities market. Normally, an investor invests his money by considering the financial health of the Company and in order to find out the same, one will naturally would bank upon the accounts and balance-sheets of the Company. If it is unearthed during inquiry before SEBI that a particular Chartered Accountant in connivance and in collusion with the Officers/Directors of the Company has concocted false accounts, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... false accounts in connivance and in collusion with the Officers / Directors of the Company then SEBI could take action. 22. The Bombay High Court held that in view of the various provisions contained in the SEBI Act and Regulations it is the duty of the Board to protect the interest of investors in securities and to promote the development and to regulate the securities marked by such measures as it thinks fit. The Bombay High Court held that while exercising the powers under the SEBI Act, it was not open to SEBI to encroach upon the powers vested with the Institute under the Chartered Accountant Act, 1949. However, in a given case, if there was material against the Chartered Accountant to the effect that he was instrumental in preparing false and fabricated accounts in connivance, then SEBI was entitled to pass appropriate orders under section 11(4) of the SEBI Act in the interest of the investors or securities market and was entitled to take measures as prescribed in the said section. Further, appropriate directions could be given under section 11-B. 23. The Bombay High Court further held that if on conclusion of enquiry if no evidence was available regarding fabrication a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the matter and take appropriate steps against CA by preventing the CA from auditing the books of accounts of such listed Companies. (iv) SEBI can take into consideration the accounting standards provided under the CA Act to see whether a CA has violated any norms but upon conclusion of enquiry, if no evidence is available regarding fabrication, fabrication or fudging the books of accounts etc. then SEBI cannot issue any direction. (v) SEBI would adjudicate whether other Price Waterhouse firms had any role to play and if it is found that there was some omission on their part without any mens rea or connivance with anyone, then on such evidence SEBI cannot issue any further direction. 26. In Price Waterhouse Co. Vs. SEBI in appeal no. 6 of 2018 decided on 09.09.2019 , this Tribunal while considering the role of the appellant as a firm of the C.A.s and after considering the judgment of the Bombay High Court (supra) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entity and its Environment . As per the said standard, identification of risk of material misstatement is a matter of professional judgement. 32. 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. Further, the 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. 33. 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 lik ..... X X X X Extracts X X X X X X X X Extracts X X X X
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