Legal
SAT said that only the Institute of Chartered Accountants of India can take any action against its members and that negligence in auditing doesn’t amount to fraud.
Image: Bjørn Erik Pedersen via Wikimedia commons

The Securities Appellate Tribunal (SAT) has overturned the order issued by SEBI banning Price Waterhouse Coopers over the Satyam Computers case. SEBI had ruled that PwC cannot take up auditing of any listed company for two years. The issue relates to the case of Satyam Computers, which was found to be in deep trouble financially since the promoter Ramalinga Raju had indulged in window-dressing the balance sheets of the company for years. Price Waterhouse, the company’s auditors at that time, failed to detect any irregularity and this was the reason for SEBI passing the ban order.

SAT, however, took a different stance and said it was not under SEBI’s purview to come to conclusion on the quality of audit being undertaken by the Chartered Accountants. It has to be done by the Institute of Chartered Accountants of India, ICAI, which alone can ban its members for not performing as per the standards and norms set by the institute.

At the same time, SAT has found there was a breach of duty and therefore it ordered that the Rs 13 crore fee paid to PwC be recovered along with interest from the audit firm. SAT has found mere negligence in auditing and says negligence cannot be equated with fraud. SAT goes on to affirm that the role of SEBI in such cases is to remedy the situation and take steps to prevent them. It finds the banning of PwC is not the right way. Further, the Tribunal has held that action against 10 firms associated with PwC is also not fair. It has suggested that only couple of partners who were directly connected to the audit of Satyam Computers should be proceeded against.

The Satyam Computer case came to the fore when the promoter himself confessed that he had been fudging the account books. There were inflated amounts showed as fixed deposits which the auditors perhaps failed to verify through certificates from the concerned banks. What was originally thought of as a Rs 5,000 crore scam turned out to be worth as high as Rs 7,800 crore when SEBI conducted its investigation.