2023 (12) TMI 381 - AT - SEBI

SEBI cannot act against chartered accountants for professional negligence without proving fraud or conspiracy

The Securities Appellate Tribunal, Mumbai held that SEBI's jurisdiction to take action against chartered accountants is limited to cases involving fraud, ... Power of SEBI to initiation action against Chartered Accountant (CA) / Auditor of the company - misconduct dereliction of duties and abhorrence of due diligence while conducting statutory audit - auditor as directed that the certified copy of the order be forwarded to the Institute of Chartered Accountants of India ('ICAI') and National Financial Reporting Authority ('NFRA') for appropriate action against the appellants - HELD THAT:- The scope of inquiry by SEBI is very limited and is confined only to the charge of conspiracy of involvement of the appellant in the fraud, if any, and to take consequential action if there is connivance or conspiracy with the appellant and its directors. Only then, SEBI could take action under the SEBI Act and the PFUTP Regulations otherwise it is not open to SEBI to inquire into any charge of professional negligence of the auditor since the audit firm is not dealing directly in securities. The scope and jurisdiction of SEBI to conduct an inquiry against a Chartered Account or a Chartered Accountant Firm was considered by the Bombay High Court in Price Waterhouse & Co. & Another vs. SEBI [2010 (8) TMI 173 - HIGH COURT OF BOMBAY] it is not open to SEBI to encroach upon the powers vested with the Institute under the CA Act and if there is any material against the Chartered Accountant to the effect that he was instrumental in preparing false and fabricated accounts then SEBI has powers to take remedial or preventive measures under the SEBI Act. The Bombay High Court held that the jurisdiction of SEBI would also depend upon the evidence which is available during such inquiry and if it is found that a particular Chartered Accountant has concocted false accounts in connivance and in collusion with the Officers / Directors of the Company then SEBI could take action. Jurisdiction of SEBI would depend upon the evidence which is available and if there was some omission without any mens rea or connivance with anyone, in any manner then SEBI cannot issue any further direction and was required to drop the proceedings. In the instant case, the WTM has given a categorical finding that there is no evidence showing fraud or connivance by the appellants with the officers or directors of the Company. WTM has further given a finding that there is insufficient evidence to hold that the appellants had actually manipulated the books of accounts with knowledge and fraudulent intention and that there was no tangible evidence to show that the appellant had committed a fraud in collusion or connivance with the officers of the Company or its management. Once there is a finding that the appellants have not manipulated the books of accounts with knowledge and fraudulent intention or in connivance with the officers or management of the Company then no directions could be issued by the WTM to the ICAI or NFRA to consider dereliction of duties and abhorrence of due diligence while conducting statutory audit as in our opinion it was outside the domain of the WTM to issue such directions. At best, administrative directions could have been issued by SEBI to the aforesaid institutions to consider the alleged irregularities but beyond that no adjudicatory directions could be issued by the WTM. Issues Involved:1. Jurisdiction of SEBI to take action against Chartered Accountants.2. Evidence of fraud or connivance by the statutory auditors.3. SEBI's authority to issue directions to ICAI and NFRA.Summary:Jurisdiction of SEBI to take action against Chartered Accountants:The Tribunal reviewed the scope and jurisdiction of SEBI to conduct inquiries against Chartered Accountants, referencing the Bombay High Court's decision in *Price Waterhouse & Co. & Another vs. SEBI*. It was emphasized that SEBI's jurisdiction is limited to cases where there is evidence of conspiracy or involvement in fraud by the auditors. SEBI can take remedial measures to protect investors but cannot encroach upon the powers vested with the Institute under the CA Act.Evidence of fraud or connivance by the statutory auditors:The WTM found no evidence to show that the appellant had committed fraud in auditing the books of accounts in connivance with the management. There was insufficient evidence to demonstrate that the appellants had manipulated the books of accounts with knowledge and fraudulent intention. The WTM granted the appellants the benefit of doubt regarding the commission of fraud by the Company.SEBI's authority to issue directions to ICAI and NFRA:Despite finding gross negligence and dereliction of duties on the part of the appellants, the WTM's directions to the ICAI and NFRA were deemed beyond SEBI's jurisdiction. The Tribunal held that SEBI cannot regulate the profession of Chartered Accountants and any adjudicatory directions to ICAI or NFRA were outside the domain of the WTM. Administrative directions could be issued, but not adjudicatory ones.Conclusion:The Tribunal quashed the impugned order and the directions issued by the WTM in paragraphs 41 and 42, thus allowing the appeal.