MUMBAI : The Securities Appellate Tribunal (SAT) in a recent ruling overturned a Securities and Exchange Board of India (Sebi) order that pulled up a statutory auditor in a case pertaining to alleged financial fraud by Deccan Chronicle Holdings Ltd (DCHL), adding to the debate on Sebi’s jurisdiction on auditors when they audit listed entities.
The tribunal held that in case of any misconduct by auditors or chartered accountants, it is the Institute of Chartered Accountants of India’s (ICAI’s) responsibility to take appropriate action.
The SAT order said “gross negligence or recklessness in adhering to accounting norms in the course of auditing can only point to the professional negligence, which would amount to misconduct to be taken up only by the Institute of Chartered Accountants of India".
The matter pertains to an appeal filed by Mani Oommen, a statutory auditor from C. B. Moulli & Associates, before the tribunal against a December 2019 order passed by a whole-time member of Sebi. The order prohibited Oommen from issuing any certificate of audit and restrained him from rendering any other auditing services to any listed company or intermediary for a year.
A show cause notice alleged Oommen had violated Sebi’s (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations.
DCHL, its promoters, and Oommen, the company auditor, were served a show cause notice alleging that the company understated its outstanding loans by ₹1,339.17 crore in 2008-09.
The notice also alleged that the company had manipulated its financials and failed to make disclosures. It said the promoters of DCHL, who are also the owners of Deccan Chronicle Marketeers (DCM), had transferred loans on the last day of the financial year and reverted them on the first day of the next year, thus providing misleading financial information such as understatement of outstanding loans and interest, and financial changes in the annual reports for the financial years 2008-09, 2009-10, and 2010-11.
The findings of the whole-time member showed that the company’s promoters and directors were aware of the private and discreet agreement between DCHL and DCM and they understated the loans and liabilities in DCHL’s yearly accounts, misleading shareholders.
Oommen, the statutory auditor, did not record outstanding loans and was not ‘diligent and cautious’, the Sebi member said. It was the auditor’s responsibility to check outstanding loan details from banks and other independent sources, which he did not do, the member said.
“ Oommen blindly allowed the fudging of the books of accounts by the company, which suggests that he colluded with the company and its promoters and directors," Sebi said in its order. However, the SAT’s order said auditors can be held liable if they are instrumental in preparing false and fabricated accounts.
A bench headed by Justice Tarun Agarwala said in a 12-page order, “There is no finding that the appellants were instrumental in preparing false and fabricated accounts or have connived in preparation or falsification of the books of account". In the absence of any deceit or inducement, the question of fraud committed by the appellants does not arise, it said.
