2023 (12) TMI 318 - AT - SEBI

CA firm wins appeal against SEBI adjudication proceedings under Section 12A for alleged book cleaning facilitation

Chaturvedi & Shah LLP (earlier known as ‘M/s Chaturvedi & Shah’) Versus Securities and Exchange Board of India

Chaturvedi & Shah LLP (earlier known as ‘M/s Chaturvedi & Shah’) Versus Securities and Exchange Board of India - TMI Issues Involved:1. Alleged violation of Section 12A(a), (b), and (c) of the SEBI Act, 1992 read with Regulations 3(b), (c), and (d), 4(1), and 4(2)(f) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003.2. The role and knowledge of the appellant regarding the transactions involving Nashik Property and Kanjurmarg Property.3. The jurisdiction and scope of SEBI's inquiry into the conduct of Chartered Accountants.4. The professional standards and responsibilities of statutory auditors versus forensic auditors.Summary:1. Alleged Violation of SEBI Act and PFUTP Regulations:The appellant, a leading firm of Chartered Accountants, was penalized by SEBI for allegedly violating Section 12A(a), (b), and (c) of the SEBI Act, 1992, and Regulations 3(b), (c), and (d), 4(1), and 4(2)(f) of the PFUTP Regulations. The AO concluded that the appellant facilitated the cleaning up of the books of the Company despite being aware of irregularities and misstatements in the financial statements.2. Role and Knowledge of the Appellant:The AO found that the transactions involving Nashik Property and Kanjurmarg Property, which included significant sums of money, were not reflected in the financial statements. Despite the AO's findings, the Tribunal noted that there was no documented evidence of these transactions and that the appellant was not aware of them. The Tribunal emphasized that the appellant was a statutory auditor, not a forensic auditor, and relied on the documents provided by the Company, which did not indicate any irregularities.3. Jurisdiction and Scope of SEBI's Inquiry:The Tribunal highlighted the limited scope of SEBI's inquiry, which should be confined to the charge of conspiracy and involvement in fraud. The Tribunal referenced the Bombay High Court's decision in Price Waterhouse & Co. vs. SEBI, which stated that SEBI cannot encroach upon the powers vested with the Institute under the CA Act. SEBI can only take action if there is evidence of connivance or conspiracy with the Company's officers.4. Professional Standards and Responsibilities:The Tribunal noted the distinction between statutory auditors and forensic auditors, emphasizing that statutory audits are conducted on a test-check basis and are subject to inherent limitations. The appellant had followed the accounting standards prescribed by the ICAI, and there was no evidence of their involvement in fabricating or falsifying accounts. The Tribunal concluded that any issues of professional negligence should be referred to the ICAI, not SEBI.Conclusion:The Tribunal found that the AO's findings were based on presumptions and conjectures. There was no evidence of the appellant's direct involvement in the fraudulent transactions or any collusion with the Company's directors or promoters. Consequently, the impugned order was quashed, and the appeal was allowed.