The Securities Appellate Tribunal (SAT) has overturned the 2-Year ban imposed by market regulator SEBI (Securities & Exchange Board of India) on Price Waterhouse & Co (PwC).
Last year, SEBI had barred PwC from undertaking any fresh audit or issuing any certificate of audit to listed companies following an investigation related to the Satyam Computer Services Ltd (SCSL) scam.
Coming down heavily on the market regulator, the Tribunal says, "The show cause notice was issued on 14 February 2009 and 26 August 2009. The impugned order was passed on 10 January 2018. It took SEBI nine long years to complete the proceedings and the fault lay entirely on SEBI. The request of the appellants to cross examine certain individuals whose statements were relied upon by SEBI was rejected. This Tribunal on 1 June 2011 allowed the appeal and directed SEBI to allow cross examination. SEBI did not do so and took the matter to the Supreme Court and kept it pending for six years. The Supreme Court on January 2017 held that the stand of SEBI was incorrect and directed that cross examination and inspection should be allowed to the appellants."
According to a report from the Economic Times
, SAT has ruled that there is no shred of evidence that the auditors fabricated, fudged or were in collusion with the management of SCSL.
“SAT also ruled that negligence cannot amount to misconduct and SEBI action based on no direct evidence cannot be maintained. If the audit of Satyam was conducted in a careless or reckless way by the audit firm then action can only be taken under CA Act by the Institute and not by SEBI,” the report says.
Last year in January, SEBI had also asked PwC, its partners S Gopalakrishnan and Srinivas Talluri to pay a fine of Rs13.09 crore along with an interest of 12% from 7 January 2007 for fudging account books and reports of SCSL.
SAT, however, sustained the order by SEBI for disgorging the amount. It says, "...a professional may be held negligent if he is not possessed of the requisite skill, which he professed to have possessed or he did not exercise with reasonable competence. In the light of the aforesaid, the WTM found that for this negligence, the auditors and the firms benefitted by way of charging a fee amounting to Rs13.09 crore. The WTM was of the opinion that this wrongful gain was liable to be disgorged. We find that for this professional lapse, there has been a breach of duty and failure to maintain that standard of care. For this lapse / negligence, we are of the opinion that the appellants were not justified to retain this amount. In our opinion, the WTM was justified in disgorging the said amount along with interest. The power was rightly exercised under Section 11 and 11-B of the SEBI Act to persons who in some way was associated with the securities market as well as under the Companies Act."
Immediately after the SEBI order, PwC had moved to the SAT, which in January 2018, while declining any stay on the order had allowed the auditing firm to continue with its (the then) existing audit assignments for FY17-18 and also for the calendar year 2018.
In a 108-page order G Mahalingam, whole-time member of SEBI, had said, "The investigation found that certain directors and employees of SCSL had connived and collaborated in the overstatement, fabrication, falsification and misrepresentation in the books of account and financial statements of SCSL. The published books of account of SCSL contained false and inflated current account bank balances, fixed deposit balances, fictitious interest income revenue from sales and debtors’ figures and for several years. The investigation also noted that the statutory auditors of SCSL had connived with the directors and employees of SCSL in falsifying the financial statements of SCSL."
The auditors' report, balance sheets and profit and loss accounts of SCSL were signed by S Gopalakrishnan, CA between April 2000 to March 2007. He was a partner in PwC and Lovelock and Lewes.
The auditors’ report, balance sheets and profit and loss account of SCSL between April 2007 to September 2008 were signed by CA Srinivas Talluri on behalf of PwC.
The SEBI order had said PwC firms have benefited from the relationship from SCSL, by having collectively received a fee of Rs23.31 crore during 2000-2008. Out of this amount, Rs13.09 crore was paid towards PwC, Bangalore for the audit of SCSL, as submitted by the audit firm.
“Given that this remuneration was the identifiable monetary gain made by PwC in its association with the audit of SCSL, it is clear that this wrongful gain is liable to be disgorged. Though the legal portions of that gain or costs such as taxes paid are required to be reduced, the noticees have not provided details of such costs or expenses in their replies. Consequently the entire gain made from PwC's relationship with SCSL shall be treated as wrongful gain liable to be disgorged,” SEBI had said.
Both Mr Gopalakrishnan and Mr Talluri were also banned from issuing any audit certificated to any listed entity for the next three years.