TaxTMI 
TaxTMI 
2011 (5) TMI 353
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....ccountants registered with ICAI. In the year 2000, the firm was appointed as the statutory auditors of M/s. Satyam Computer Services Ltd. (SCSL). The statutory audits of SCSL for the years 2001 to March, 2007 were conducted and the reports were signed by Mr. Subramani Gopalkrishnan, the appellant in LPA No. 885/2010 [the petitioner in WP(C) No. 5352/2010]. The statutory audit for the quarters ending 30th June, 2007 and 30th September, 2008 were conducted and signed by Mr. Talluri Srinivas, the appellant in LPA No. 886/2010. As the factual matrix would further unfurl, on 7th January, 2009, Mr. B. Ramalinga Raju, the then Chairman of SCSL, in a communication send to the Board of Directors, disclosed that the balance sheet of SCSL as on 30th September, 2008 carried inflated (non-existent) cash and bank balances of Rs. 5,040 Crores (as against Rs. 5361 Crores reflected in the books) and accrued non-existent interest of Rs. 376 Crores. The liability was understated to the extent of Rs. 1230 Crores on account of funds arranged by him and the accounts overstated the debtors position by Rs. 490 Crores (as against Rs. 2651 crores reflected in the books). Quite apart from the above, there we....
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..... Srinivas and seven other accused persons for offences punishable under sections 409, 420, 468, 471, 477A, 201 and 120B of the Indian Penal Code. It is worth noting that at the instance of the CBI, a Multi Disciplinary Investigation Team (MDIT) was constituted and a report was prepared by the ICAI group on 5th April, 2009. One of the conclusions recorded by the said group is to the following effect: "19.1 The statutory auditors have failed to exercise reasonable care and compliance with various auditing and assurance standards issued by the Institute of Chartered Accountants of India as a generally accepted auditing practice while reporting on the financial statements and the materiality of the misstatements are so huge that it has rendered the financial statements for all these years as untrue and unfair. However, the executive, management and staff have drawn substantial amounts as remunerations, commission, incentives, bonuses, ESOPs. The management has also declared the dividends to its shareholders under the Companies Act, 1956. However, all these overstatements and misstatements have reported the EPS at a higher level in the financial reporting annually as well as quarter....
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....nary proceedings had commenced not only form the basis of a prima facie opinion but also form the basis of various charges against him in the criminal cases and, hence, any disclosure of his explanation or defences until the final conclusion of the criminal trial pending before the Special Court at Hyderabad would seriously impact his defence in the criminal trial. When the ICAI decided to proceed with the disciplinary proceedings, Srinivas filed WP(C) No. 2505/2010 and the learned Single Judge initially directed postponement of the disciplinary proceedings for some time. 7. As is reflectible, on 25th June, 2010, Gopalakrishnan was granted bail by the High Court of Andhra Pradesh with certain conditions and thereafter, similar proceeding was initiated against him and he also took the same plea. Being grieved by the action of the ICAI, he preferred WP(C) No. 5352/2010. 8. It was urged before the learned Single Judge that the charge sheet in the criminal case and the prima facie opinion formed by the Director (Discipline), ICAI are more or less identical and the list of witnesses in both the proceedings are same and if they are allowed to continue simultaneously, serious prejud....
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....t there were 433 witnesses in the criminal trial whereas there are very few witnesses in the departmental proceedings. Additionally, it was urged that no prejudice would be caused to them; that the examination of documents by certain witnesses are formal in nature and certain witnesses are not to be examined and, hence, the doctrine of prejudice does not get attracted. 10. The learned Single Judge referred to various decisions in the field with regard to the simultaneous continuation of the disciplinary proceedings and posed the question that in a case of this nature, the Court is called upon to examine (a) Are the charges on which the disciplinary proceedings are proposed to be held identical or nearly similar to the charges on which they are facing criminal proceedings? (b) Are the criminal charges of a grave nature? (c) Do the charges involve complicated questions of law and fact? 11. After posing the questions, the learned Single Judge expressed the view as under: "46. It may at the outset be noticed that in the criminal case, arguments on charge which were in progress when these petitions were argued have been framed by the Special Judge on 25th October 2010. The offe....
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.... be satisfied in their cases viz. , that the criminal cases in which they are arrayed as accused involve complicated questions of law and fact. They have therefore been unable to persuade this Court, on the basis of the law explained above, to stay the disciplinary proceedings pending the conclusion of the criminal trial." 12. Be it noted, the learned Single Judge also addressed himself with regard to the right against self-incrimination and referred to the decision in Romesh Chandra Mehta v. State of West Bengal AIR 1970 SC 940 wherein the Apex Court has also referred to the earlier decision in State of Bombay v. Kathi Kalu Oghad AIR 1961 SC 1808 and eventually came to hold that the submission that if the appellants were asked to appear in the disciplinary proceeding under the CA Act, their fundamental right under Article 20(3) of the Constitution would be violated was sans substance. 13. We have heard Mr. Shyam Divan, learned senior counsel along with Mr. R. Sudhinder, Mr. Rahul Ravindran and Ms. Prerna Amitabh for the appellant in LPA 885/2010, Mr. T. Andhyarujina, learned senior counsel along with Mr. R. Sudhinder, Mr. Rahul Ravindran and Ms. Prerna Amitabh for the appell....
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....he present case, the charges in both the disciplinary proceedings as well as in the prosecution are of grave nature and involve complicated questions of law, there should be stay of the disciplinary proceedings. (E) The appellant has been suspended from his practice as a chartered accountant by his own firm and is unable to practise and, hence, no prejudice would be caused to ICAI if the proceedings are stayed until the criminal prosecution is completed by 31st July, 2011, as directed by the Apex Court. (F) The evidence disclosed by the appellant in the disciplinary proceedings would be known to the CBI in the criminal case. The prosecution has also listed the Director (Discipline) of ICAI as a witness who had formed the prima facie opinion against the appellant for the purpose of issuance of the notice to show cause and, this is bound to cause prejudice to the appellant. The prosecution has also listed Sh. Uttam Prakash Agarwal as PW-24 and he was the first president of the ICAI and author of the report of the ICAI Multi Disciplinary Team which has arrived at the conclusion that the appellant is guilty of misconduct. Similarly, certain witnesses are c....
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....etired as a partner of PW. In effect, the appellant is suspended from practice. There can be no prejudice to the ICAI if the proceedings are stayed until the criminal prosecution is completed as mandated by the Supreme Court before 31-7-2011. 16. An additional affidavit has been filed by Subramani Gopalakrishnan, the appellant in LPA No. 885/2010, with regard to the progress of the trial. We think it appropriate to reproduce a few paragraphs from the same which have been pressed into service by the learned counsel for the appellant: "(i) I say that pursuant to the directions of the Hon'ble Supreme Court dated 26-10-2010, the trial in the criminal proceedings is being conducted on a day-to-day basis since 8th November, 2010. I state that as off date more than 100 witnesses have already been examined and cross-examined. Further the CBI has given up 192 witnesses as informed to the court from time to time, out of 470 witnesses cited in the counter by ICAI and therefore effectively 292 witnesses are over. The CBI files a schedule of witnesses it proposes to examine periodically and the said charts/schedules filed by CBI are used for summoning the witnesses for examina....
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.... witnesses of record. (iii) There is no provision for suspension of a delinquent member pending the disciplinary proceedings and an action can be taken only after conclusion of the proceedings under section 21B(3) of the CA Act (Amended). The petitioner, taking advantage of the fact that the disciplinary proceedings pertaining to his professional misconduct in the matter of Global Trust Bank had not been concluded, has committed professional misconduct in the present matter of 'Satyam' as he continued to have his licence to practise. The conclusion of disciplinary proceedings to its logical end is warranted due to considerations of public policy, public interest and public good. (iv) No complicated questions of law and fact are involved. The appellant has not demonstrated so and mere averment in that regard is not sufficient. This is a categorical finding of the learned Single Judge. In the present, unfortunately, the appellants have only in a parrot-like manner repeated the provisions from pages 19 to 24 to demonstrate 'Complicated questions of law.' (v) In the criminal proceedings, the charges against the appellant are under sections 120-B ....
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....ctors operating in the mind of disciplinary authority may be many, such as enforcement of discipline, etc. The standard of proof required is also different from the criminal trial. In the former, it is preponderance of probabilities while the latter charge has to be proved beyond reasonable doubt following the strict rule of evidence. The disciplinary proceedings are meant not really to punish the guilty but to keep the administrative or professional system unsullied. The advisability, desirability or propriety of staying the departmental enquiry is to be seen as per the facts of the matter since stay of disciplinary proceedings cannot be a matter of course. (x) The allegations made against the appellant vide notice dated 10-1-2009 do not refer to any allegation of conspiracy or fraud or cheating. The allegations contained in the CBI charge sheet specifically refer to the allegations and offences pertaining to conspiracy, cheating and fraud. It clearly shows that the allegations made in the charge sheet filed by the CBI and the allegations contained in the show-cause notice issued are not the same. 18. At this juncture, we think it appropriate to refer to the comparati....
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.... Company for all these years, it is apparent that the same was not possible without your knowing about the same as the Statutory auditor of the company. (i) Accused S. Gopalakrishnan (A-4) and Srinivas Talluri (A-5) have intentionally mis-represented themselves as partners of M/s. Price Waterhouse and their firm M/s. Price Waterhouse, Bangalore as 'M/s. Price Waterhouse' consciously and dishonestly entered into the said agreement in furtherance of the criminal conspiracy with V. Srinivas (A-3), B. Ramalinga Raju, (A-1) and B. Ramaraju (A-2) thereby S. Gopalakrishnan (A-4) and Srinivas Talluri (A-5) have intentionally cheated the shareholders and other stake holders by personating themselves as partners in 'M/s. Price Waterhouse' on which the shareholders & investors placed their reliance. (Page 122) (ii) In furtherance of the conspiracy the statutory auditors S. Gopalakrishnan (A-4) and Srinivas Talluri (A-5) thereby accommodated the fraudulent and dishonest acts of B. Ramalinga Raju, A-1 and B. Ramaraju (A-2) V. Srinivas (A-3) and other co-conspirators knowing fully well the implications and consequences of their overt acts. (Page 123) (iii) As a quid pro quo, the auditor....
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....ure and practice whereby it is incumbent on an individual partner of the firm to affix his signature as a representative of the Auditor firm authenticating the contents of the report. He having been aware of the fact that he never represented "M/s. Price Waterhouse" designated Auditors for M/s. SCSL, he has signed as "Price Waterhouse" and thereby cheated the investors in furtherance of the conspiracy with Sri V. Srinivas (A-3), Sri B. Ramalinga Raju, A-1 and Sri B. Ramaraju (A-2). By virtue of his status as a Statutory Auditor it is incumbent on his part to verify the bank balances and FDRs claimed to be held by M/s. SCSL besides other investments, liabilities and sales of the Company before certifying the Statutory Audit Report which forms the basis of Annual Financial Statement of the company. He has knowingly certifies the inflated/forged balance sheets prepared basing on the forged FDRs and other data with regard to the banks and also the status of the sales without making any mandatory independent verifications. The auditors are required to write directly to the banks and obtain confirmation of balances. After obtaining the confirmations they must compare these figures wit....
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.... years. He affixed his signature on the financial statements as partner of M/s. Price Water House the Statutory Auditors for M/s. SCSL since the financial year 2001 till 2007. Information Technology General Check was carried out for the first time during financial year 2006-07 by the Head of Information Systems Audit of M/s. Price Waterhouse, wherein around 180 deficiencies were found and was communicated to the Audit team with the assertion that the IT systems in existence in M/s. SCSL are not fully integrated and are subject to manipulation. It was also suggested that in the light of the above deficiencies, substantial and elaborate examination of the financials should be conducted. In spite of this Sri S. Gopalakrishnan deliberately did not make any extensive changes in the audit plan which clearly establishes his motives and intentions in allowing the fraudulent practices to continue in M/s. SCSL. Even though as many as 135 control deficiencies were identified in the integrated audit conducted in accordance with the Standards of the Public Company Accounting Oversight Board which has severe impact on the internal control and financial accounting. He deliberately did not b....
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....ifications. The auditors are required to write directly to the banks and obtain confirmation of balances. After obtaining the confirmations should compare those figures with the figures as appearing in the books of account of the company. Sri Talluri Srinivas (A-6) received the confirmations from the banks which were in great variance with the figures as provided by the management and appearing in the book of accounts. Despite this glaring discrepancy and having both confirmations i.e., the original confirmations from the banks and the forged bank confirmations provided by the other accused. Sri Talluri Srinivas, in furtherance of the conspiracy, has chosen the forged bank confirmations provided by the accused, certified the same and incorporated them in the final accounts. He has flouted the prescribed Audit and Assurance Standards number 30 of the Institute of Chartered Accountants of India, thereby facilitated the projection of falsified data in the Annual Financial Statements of the company continuously. The presentations made by him to the audit committee about the health of the company were misleading and in fact he gave a very good certification regarding the financial di....
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.... member 'Price Waterhouse, Bangalore' and not 'Price Waterhouse'. As such the certification of Statutory Audit Reports by such non-member Audit Firms consequently invalidates the Annual Financial Statement of the Company which is a statutory requirement under law to invite investments from the prospective investors. Letters generated on the letter pads of M/s. Price Waterhouse were recovered from the computer systems of M/s. SCSL. These letters were supposed to be written by the auditors addressed to the banks seeking confirmations of balances. Sri Talluri Srinivas as part of the conspiracy, got these letters generated in the computer systems of M/s. SCSL for the purpose of creation of records which depicts his privy and involvement in the conspiracy. He also made M/s. SCSL to generate certain letters addressed to the banks directing the banks to directly inform to the auditors. However, these letters were generated merely for the purpose of record which shows the role of Sri Talluri Srinivas in the conspiracy. But for his active cooperation this would not have taken place for the period since 2007. The above acts of Sri Talluri Srinivas reveal the offences punishable under s....
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....ovelock & Lewes (FRN) 9. Shri Pulavarthi Siva Prasad, Part of Audit Team 10. Shri Chintapatla Ravindernath, Part of Audit Team 11. Shri Srikant Pola, Part of Audit Team." 20. Keeping in view the aforesaid factual scenario, we may refer with profit to certain authorities in the field which relate to the role of the Court when a challenge is made to continuation of the disciplinary proceeding or enquiry, when the same person is facing criminal prosecution. 21. In Capt. M. Paul Anthony v. Bharat Gold Mines Ltd. AIR 1999 SC 1416, it has been stated thus: "13. As we shall presently see, there is a consensus of judicial opinion amongst the High Courts whose decisions we do not intend to refer in this case, and the various pronouncements of this Court, which shall be copiously referred to, on the basic principle that proceedings in a criminal case and the departmental proceedings can proceed simultaneously with a little exception. As we understand, the basis for this proposition is that proceedings in a criminal case and the departmental proceedings operate in distinct and different jurisdictional areas. Whereas in the departmental proceedings, w....
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....oreover, 'advisability', 'desirability' or 'propriety', as the case may be, has to be determined in each case taking into consideration all the facts and circumstances of the case. The ground indicated in D.C.M. and Tata Oil Mills is also not an invariable rule. It is only a factor which will go into the scales while judging the advisability or desirability of staying the disciplinary proceedings. One of the contending considerations is that the disciplinary enquiry cannot be - and should not be - delayed unduly. So far as criminal cases are concerned, it is well known that they drag on endlessly where high officials or persons holding high public offices are involved. They get bogged down on one or the other ground. They hardly ever reach a prompt conclusion. That is the reality inspite of repeated advice and admonitions from this Court and the High Courts. If a criminal case is unduly delayed that may itself be a good ground for going ahead with the disciplinary enquiry even where the disciplinary proceedings are held over at an earlier stage. The interests of administration and good Government demand that these proceedings are concluded expeditiously. It must be remembered that ....
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....proceedings were held over at an earlier stage. It would not be in the interests of administration that persons accused of serious misdemeanour should be continued in office indefinitely awaiting the result of criminal proceedings." 24. After discussing all the decisions in the field, the principles that have been culled out in Capt. M. Paul Anthony's case (supra) read as follows: "22. The conclusions which are deducible from various decisions of this Court referred to above are: (i) Departmental proceedings and proceedings in a criminal case can proceed simultaneously as there is no bar in their being conducted simultaneously, though separately. (ii) If the departmental proceedings and the criminal case are based on identical and similar set of facts and the charge in the criminal case against the delinquent employee is of a grave nature which involves complicated questions of law and fact, it would be desirable to stay the departmental proceedings till the conclusion of the criminal case. (iii) Whether the nature of a charge in a criminal case is grave and whether complicated questions of fact and law are involved in that ....
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.... on the part of the High Court to arrive at a finding that the non-stay of the disciplinary proceedings shall not only prejudice the delinquent officers but the matter also involves a complicated question of law. 24. The standard of proof in a disciplinary proceedings and that in a criminal trial is different. It there are additional charges against the delinquent officers including the charges of damaging the property belonging to the bank which was not the subject matter of allegations in a criminal case, the departmental proceedings should not have been stayed." [Emphasis supplied] 26. In NOIDA Entrepreneur Association v. NOIDA 2007 (2) Jt. 620, the Apex Court has expressed thus: "12. The purpose of departmental enquiry and of prosecution is two different and distinct aspects. The criminal prosecution is launched for an offence for violation of a duty the offender owes to the society, or for breach of which law has provided that the offender shall make satisfaction to the public. So crime is an act of commission in violation of law or of omission of public duty. The departmental enquiry is to maintain discipline in the service and efficiency of public service. It would,....
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....stay of the disciplinary proceedings. It needs no special emphasis to state, the onus is on the delinquent employee that serious prejudice would be caused, if the parallel proceedings are allowed to continue. It is well settled in law that the burden of proof in a criminal trial is quite stringent, as an accused is entitled to benefit of doubt and the consequent acquittal, but the test of preponderance of possibilities in departmental proceedings is different. But regard being had to the nature of proof required in the departmental proceedings enquiry, a charged employee may not be entitled to exoneration. Regard must be given to the fact that in the departmental proceeding, the standard of proof is totally different. The cannons of service jurisprudence require that the departmental proceedings are put to an end as expeditiously as possible. The exception carved out is that the delinquent employee should be exposed to grave prejudice and the charges levelled against him should be so grave and involve complex questions of law and fact, so that it is undesirable and apposite to invite an interdiction in exercise of inherent jurisdiction by the Court. As has been stated by their Lord....
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....trial by end of July 2011 becomes an additional reason on the part of the institute not to proceed with the enquiry. The submissions, in oppugnation, by the learned senior counsel for the respondents as we have noted hereinbefore are that the charges are absolutely different; that the question of fraud and cheating are not involved in the departmental enquiry; that the witnesses are few in number in the departmental proceeding; that there is a violation of accounting standards by the CA which cannot be gone into in the criminal trial; that they have not functioned appositely as statutory auditors; that they have not shown due diligence and acted with gross negligence; that they have failed to obtain sufficient information and there has been material departure from the generally accepted procedure of accounting; that the direction for conclusion of trial does not help as there are number of witnesses; that the standard of proof is totally different; and that the conspiracy and other factors are not the matter in the disciplinary proceeding. Quite apart from the above, it is contended that the appellants cannot take shelter under the umbrella that they have stopped practising inasmuc....