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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 ..... hartered Accountants consisting of 14 partners and 250 accountants, article assistants and others. The appellant was appointed as the joint statutory auditor of CG Power and Industrial Solutions Ltd. (hereinafter referred as 'the Company') along with M/s. Sharp & Tannan for the financial year 2016-17. As a result of division of work between the appellant and M/s. Sharp & Tannan, the appellant was responsible 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration for purchase of Kanjurmarg Property in terms of the MOU. In turn, CG Power advanced an amount of Rs. 192 crores to Action without charging interest; (c) In both above transactions, the advance received by CG Power from Blue Garden and immediate transfer of the same to Action and / or Avantha, was not reflected by CG Power in its financial statements, reason 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s adjusted against the amount transferred as loans to Action and Avantha through journal entries. The AO in spite of finding that the appellant was unaware of the transactions made by the Company with Blue Garden and Action held that the appellant being a statutory auditor was aware that the Company had advanced a sum of Rs. 28 crore to Blue Garden and had also perused 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 Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uments there was no reason for the appellant to suspect the non-genuineness of the advance of Rs. 28 crore by the Company to Blue Garden for consultancy services. 15. The fact that the balance confirmation was signed by a person who was not authorized is immaterial since there is no dispute with the figures given in the balance confirmation which matched 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ow cause notices to the petitioners are concerned, we have already pointed out various provisions contained in the SEBI Act and the Regulations. Section 11 (1) of the SEBI Act, which we have incorporated earlier, provides that it is the duty of the Board to protect the interests of investors in securities and to promote the development 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or elsewhere, and shall be entitled to require from the officers of the Company such information and explanations as the auditor may think necessary for the performance of his duties. The auditors in the Company are functioning as statutory auditors. They have been appointed by the shareholders by majority. They owe a duty to the shareholders 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 fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ental in preparing false and fabricated accounts then SEBI has powers to take remedial or preventive measures under the SEBI Act. The Bombay High Court held that the jurisdiction of SEBI would also depend upon the evidence which is available during such inquiry and if it is found that a particular Chartered Accountant has concocted 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the CA firms was done with their knowledge and intent. (iii) If during investigation and enquiry, if any evidence is brought on record to show that the auditors had connived and were in collusion with B. Ramalinga Raju and had fabricated the books of accounts of balance sheet, then SEBI can proceed 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 jud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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