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of <h1>Tribunal limits SEBI's power in auditing case, upholds disgorgement order</h1> <h3>Price Waterhouse And Co. now known as Price Waterhouse And Co. Bangalore LLP And Chartered Accountants LLP, M/s. Lovelock And Lewes, M/s. Dalal And Shah, M/s. Dalal & Shah now known as Dalal And Shah Chartered Accountants LLP Versus Securities and Exchange Board of India, Mumbai</h3> Price Waterhouse And Co. now known as Price Waterhouse And Co. Bangalore LLP And Chartered Accountants LLP, M/s. Lovelock And Lewes, M/s. Dalal And Shah, ... Issues Involved:1. Jurisdiction of SEBI over Chartered Accountants (CAs) and CA firms.2. Conspiracy and involvement of auditors in the fraud at Satyam Computer Services Limited (SCSL).3. Professional negligence versus fraudulent conduct.4. Liability of CA firms under the Price Waterhouse (PW) network.5. Validity of SEBI’s punitive measures against CA firms and auditors.6. Disgorgement of wrongful gains by the auditors and CA firms.Detailed Analysis:1. Jurisdiction of SEBI over Chartered Accountants (CAs) and CA firms:The Bombay High Court clarified that SEBI could investigate and take action against CAs and CA firms if there was evidence of their involvement in preparing false and fabricated accounts with knowledge and intent. SEBI’s jurisdiction was limited to cases where there was clear evidence of connivance and collusion with the management of a listed company in falsifying accounts.2. Conspiracy and involvement of auditors in the fraud at Satyam Computer Services Limited (SCSL):The investigation revealed that SCSL’s financial statements were manipulated, but there was no direct evidence showing that the auditors from Price Waterhouse (PW) firms were involved in the fabrication of accounts. The auditors were found to have relied on the documents provided by SCSL, which turned out to be falsified by the company’s management. The Tribunal concluded that the auditors did not have any intention or knowledge of the fraud perpetrated by SCSL’s management.3. Professional negligence versus fraudulent conduct:The Tribunal differentiated between professional negligence and fraudulent conduct. It held that the auditors’ failure to seek direct confirmation of bank balances and fixed deposits amounted to negligence but did not constitute fraud. The auditors’ actions were seen as lapses in professional duty rather than intentional misconduct. The Tribunal emphasized that negligence alone does not equate to fraud unless there is evidence of intent and collusion.4. Liability of CA firms under the Price Waterhouse (PW) network:The Tribunal found that the ten PW firms were independent entities with separate legal and financial identities, despite sharing resources under a network agreement. There was no evidence that these firms were involved in the audit of SCSL or had any knowledge of the fraud. The Tribunal rejected the notion that the entire PW network could be held liable for the actions of one firm, emphasizing that liability cannot be transferred across independent entities within a network.5. Validity of SEBI’s punitive measures against CA firms and auditors:The Tribunal held that SEBI’s order debarring the PW firms and auditors from auditing listed companies was punitive and not remedial. It was found to be in violation of Article 19(1)(g) of the Constitution, which guarantees the right to practice any profession. The Tribunal stated that SEBI’s powers under Sections 11 and 11B of the SEBI Act are intended to be remedial and preventive, not punitive. The Tribunal quashed the debarment order, noting that the appropriate body to address professional negligence is the Institute of Chartered Accountants of India (ICAI).6. Disgorgement of wrongful gains by the auditors and CA firms:The Tribunal upheld SEBI’s order for the disgorgement of Rs. 13,09,01,664 along with interest, concluding that the auditors and their firms should not retain the fee earned from the audit of SCSL due to the professional lapses. The Tribunal found that the auditors’ negligence justified the disgorgement order under Sections 11 and 11B of the SEBI Act.Conclusion:The Tribunal quashed SEBI’s order debarring the PW firms and auditors from auditing listed companies, emphasizing that SEBI’s jurisdiction is limited to cases of proven fraud involving intent and collusion. The Tribunal upheld the disgorgement order, recognizing the auditors’ professional negligence but distinguishing it from fraudulent conduct. The decision underscored the importance of maintaining the distinction between professional lapses and intentional fraud, and the appropriate jurisdiction of regulatory bodies.
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