Sebi moves apex court against SAT order quashing ban on Price Waterhouse

Market regulator Sebi on Tuesday moved the Supreme Court challenging the Securities Appellate Tribunal’s order that quashed its two-year ban imposed on audit firm Price Waterhouse (PW) in the wake of the Satyam Computer fraud in 2009.

Sebi had in January last year barred Price Waterhouse (PW) and two auditors — S Gopalakrishnan and Srinivas Talluri — from auditing listed companies and had also directed the latter not to engage any audit firm forming part of the Price Waterhouse network. The ban order was passed on the grounds that the auditors had totally abdicated their “duty to follow the minimum standards of diligence and care expected from a statutory auditor, compelling the Whole Time Member (of Sebi) to draw an inference of malafides” and their involvement in the “large scale financial manipulations of Satyam Computer Services Ltd.”

The fraud dates back to 2009 when Satyam Computer founder B Ramalinga Raju confessed to cooking the company’s books and inflating profits. Satyam’s board was superseded and later the company was auctioned and taken over by Tech Mahindra.

On appeal, SAT on September 9 had ruled that negligence does not amount to misconduct and if the audit of Satyam was conducted in a careless or reckless manner by the audit firm, then action can only be taken by the Institute of Chartered Accountants of India (ICAI) and not by Sebi. But SAT upheld Sebi’s move on disgorgement of Rs 13 crore from the auditor along with interest of 12% since 2007 for the wrongful gain.

Challenging the tribunal’s order, Sebi told the SC that these auditors had ignored vital materials like the internal audit report which flagged material discrepancies in reconciliation of the invoices. Besides, the Sebi found that the auditors had failed to get independent verification of the cash and bank balances done from banks for a period of eight years and had instead relied on purported one-line confirmation given by Satyam itself, it said. Thus, “the current account balance of `1,731.88 crore and the FD balance of `3,318.37 crore projected in the accounts of Satyam as on September 30, 2008, and as audited by PW throughout the previous 8 years and wrongly published to the world at large was without following the procedures mandated under prescribed accounting standards,” the appeal filed through counsel Pratap Venugopal stated.

According to the market regulator, the verification of the invoice management system was done in a perfunctory manner by the statutory auditors in total disregard of the accounting standards and the ICAI guidelines, the auditors ignored the internal audit findings on invoices and did not evaluate other audit evidences regarding the financial statement assertion being audited, they also clearly obfuscated the true position to the investors by deliberately skipping other steps of auditing, and all this was sufficient to establish the auditors’ complicity, acquiescence, negligence and collusion with the company and its promoters and would amount to “fraud” as contemplated under the Sebi Act.”