S Murlidharan
The latest SAT verdict quashing the SEBI ban on PwC will set you thinking about a Latin maxim, Quis custodiet ipsos custodes?
The popular saying translates into ‘who will guard the guards'. Late Justice Krishna Iyer said as much when he asked who will audit the auditors, who will judge the judges and who will police the police -- from the pulpit provided by ICAI itself way back in 1980s.
Auditors and credit rating agencies the world over have not exactly covered themselves with glory. The Enron accounting fraud in the US took a heavy toll on its auditor Arthur Andersen, one of the Big Five then, but the US Supreme Court overturned the conviction order of the lower court, saying the auditor was not destroying evidence. Andersen Tax is now a household name in the US using the brand name that once belonged to Arthur Andersen. Similarly, it has resurrected itself in the management consultancy sphere under the banner Accenture.
Back home, the Satyam fraud which rocked the nation in 2008 called into question the role of auditors under whose very nose promoter Ramalinga Raju had the temerity to perpetrate a monumental fraud by forging bank fixed deposit receipts to the tune of Rs 4,000 crore or so.
His aim was to worm into the hearts of US American Depository Receipts (ADR) investors in Satyam shares. He did this by entering fictitious sales in the books and matching them with fake fixed deposit receipts to complete the double entry.
The SAT (Securities Appellate Tribunal) rightly pointed out that the auditors failed in their fundamental duty to ask for confirmation from the banks -- a basic precaution even a rookie and wannabe auditor is taught during her apprenticeship.
In India, right or wrong, chartered accountants, who alone can audit annual financial accounts, are regulated and tried by the Institute of Chartered Accountants of India (ICAI). And all it did was to bar the partners concerned for life from practising, besides imposing a penalty of Rs 5 lakh on each of them. This obviously was just a slap on the wrist of PwC.
SEBI on its part too stepped on to the turf and barred the firm from auditing for two years in 2018, apart from asking it to disgorge a hefty audit fee of Rs 13 crore, with an interest of 12 percent per annum from 2007. It is this SEBI order that rankled the SAT, which on September 9 set it aside – effectively lifting the 2-year ban while upholding the disgorgement directive.
The SAT was spot-on when it said ICAI alone had the jurisdiction to deal with professional misconduct of auditors. But having said that, it contradicted itself by upholding the disgorgement order.
Audit fee obviously was not for a market-related service. SEBI has jurisdiction over market participants alone. The SAT also was speaking with a forked tongue when it said there was no shred of evidence that the auditors fabricated, fudged or were in collusion with the management of Satyam Computer Services.
If SEBI had no jurisdiction in the matter, the SAT should not have gone into the quality of evidence. By pronouncing on the quality, the appellate tribunal has needlessly queered the pitch by impliedly holding the auditors of mere negligence without having the intention to abet in the fraud committed by Raju.
In any case, the SAT has done well to make it clear that SEBI cannot be seized of all matters connected with the misdemeanors of listed companies in a me-too and freewheeling spirit.
At the same time, the question ‘who will guard the guards or who will audit the auditors’ remains unanswered. Self-regulation does not appeal to common sense and common man. It smacks of mutual back scratching in a manner similar to a cosy club behaviour.
If doctors can be hauled up before consumer courts, auditors too should be made to face civil and criminal courts and not allowed to hide behind the closed-door proceedings of ICAI.
S Murlidharan is a chartered accountant and columnist. Views are personal.
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