SEBI has, for the first time to my recollection, debarred an Auditor (Chartered Accountant) from issuing certificates for a wide range of entities and purposes.
The matter concerned a listed company (“the Company”) that was alleged to have carried out several accounting irregularities such as inflated revenues/profits, misclassification of assets, etc. The report of the Auditors did not point such things out. On a later date, the Company actually reversed the whole of the revenues of two years by restatement of accounts. The price of the shares of the Company had moved from Rs. 3.52 to Rs. 123.50 during the period that the Order covered. An earlier Order of the SEBI on the Company gives more details of other alleged violations by the Company.
SEBI considered the requirements of Accounting Standards and Guidance Notes issued by the Institute of Chartered Accountants of India and gave a finding that these were not complied with.
SEBI thus held that the Auditors had aided and abetted the Company in committing the alleged fraud. Accordingly, it debarred the Auditor, stating:
“… hereby prohibit Shri Shashi Bhushan, Proprietor of M/s. Bhushan Aggarwal & Co. from, from, directly or indirectly, issuing any certificate required under securities laws namely Securities Board of India Act, 1992 (sic), the Securities Contract (Regulations) Act, 1956, the Depositories Act, 1996, Rules, Regulations, Guidelines made thereunder, the Listing Agreement and the applicable provision of the Companies Act, 2013, the Rules, Regulations, Guidelines made thereunder which are administered by SEBI, with respect to listed companies and the intermediaries registered with SEBI for a period of one year.”
Some aspects need attention:-
- the prohibition is on issue of certificates and not reports.
- The certificate may be under the specified securities laws, viz., SEBI Act, SCRA and Depositories Act and the rules, regulations and guidelines issued thereunder.
- The certificate may be even under the and the applicable provision of the Companies Act, 2013, the Rules, Regulations, Guidelines made thereunder which are administered by Securities and Exchange Board of India.
- The certificate must be required under the said specified laws.
- The certificates may relate to listed companies as well as intermediaries registered with SEBI.
It is not uncommon for SEBI to find companies/intermediaries engaging in accounting irregularities. This Order may become thus one of the first of many such orders in the future. While passing the Order, SEBI stated, “This is also a fit case where SEBI needs to send a stern message to professionals who associate themselves with securities market so as to prevent them from indulging in such acts of omissions and commissions as found in this case.”. It can be expected that such orders may also be passed against other professionals such as Company Secretaries, lawyers, etc.
It will thus be interesting to watch the progress of such orders. In Price Waterhouse vs. SEBI ((2010) 103 SCL 96), the Bombay High Court had observed that, “it cannot be said that in a given case if there is material against any Chartered Accountant to the effect that he was instrumental in preparing false and fabricated accounts, the SEBI has absolutely no power to take any remedial or preventive measures in such a case. It cannot be said that the SEBI cannot give appropriate directions in safeguarding the interest of the investors of a listed 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, in our view, there is no reason as to why to protect the interests of investors and regulate the securities market, such a person cannot be prevented from dealing with the auditing of such a public listed Company.” (emphasis supplied).