TaxTMI 
TaxTMI 
2023 (6) TMI 1337
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....re, inter alia, the observations of the preliminary examination conducted by SEBI. a) ARL showed purchases and sales with Controlled / Connected Entities. The funds for the purchase and sell transactions with Controlled / Connected Entities have been noticed to be routed through circuitous transactions without actual movement of goods and; on most occasions the funds movement of many layers were happening on the same day indicating that ARL inflated its sales and profits. b) ARL prepared different sets of financial statements for FYs ending March 31, 2011, March 31, 2012 and March 31, 2013 and thereby projected untrue financial statements to various stakeholders which portrayed its intention to deceive its stakeholders. c) In the Annual Reports, ARL posted inflated figures of sales and purchases of goods. As observed from the Forensic Audit Report, goods shown as being purchased were, actually not purchased by ARL. Further, sales shown to have been made by ARL were without actual delivery of goods. d) The sales/purchases of goods were disclosed by ARL as having been made with the Controlled / Connected Entities. All these Controlled / Connected E....
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....g with the applicable provision of the Companies Act, 2013; Rules, Regulations, Guidelines made thereunder, which are administered by SEBI, with respect to- • Listed entities; • Intermediaries and • Initial Public Offer(s)". 4. Simultaneously, a detailed investigation into the trading activities was also conducted pertaining to the scrip of ARL as well as with reference to manipulations of financial statements and insider trading by promoters of the Company, while off-loading the shares of the Company during the period of April 01, 2010 to June 13, 2016 (for convenience "Investigation Period") for possible violation, if any, of the provisions of SEBI Act, 1992 and rules and regulations made thereunder. Findings of Investigation 5. In the course of investigation conducted by SEBI, while analyzing the price and trade movement in the scrip of ARL, following facts, inter alia, came to light: A. Manipulations of financial statements of ARL a) It is noticed that ARL had inflated both purchases and sales by entering into transactions with connected entities and making entries in bank statements which were either reversed or....
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....es, 'When obtaining reasonable assurance, the auditor is responsible for maintaining an attitude of Professional Scepticism throughout the audit.' The several red flags listed above, which were all too noticeable for any reasonable professional auditor to miss, failed to engender the necessary professional scepticism in the auditors associated with the audit of ARL. e) It was unearthed that the Noticees being the statutory auditors of ARL have aided /facilitated ARL in projecting untrue financial statements for financial years ending March 31, 2011, March 31, 2012 and March 31, 2013 to various stakeholders which portrayed its collusive intention in facilitating the ARL and its management to deceive its stakeholders. Noticees have knowingly failed to perform their duties in compliances with the rules prescribed for the auditors and thereby abetted ARL in preparation and presenting of false and fabricated books of account containing potential ingredients to induce investors to trade in the scrip of ARL as well as to keep shareholders and investors in dark about the true financial position of the Company. In view of the aforesaid, the Noticees have been alleged to hav....
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....0.2022, a final opportunity of personal hearing was accorded to both the Noticees on 23.11.2022, which was attended by Noticee no. 2 who advanced various arguments in his defense on the lines of the replies filed by him with SEBI. I also note that the Authorized Representative (AR) of Noticee no. 1, before appearing for the personal hearing, requested for another adjournment on the ground that a Writ Petition Application (WPA) no. 25410 of 2022 has been filed by Noticee no. 1 before the Hon'ble High Court of Calcutta. However, considering the facts that there was no stay on the present proceedings by the Hon'ble High Court of Calcutta and also the fact that already various adjournments have been provided to the Noticee no. 1 in the past, it was informed to the Noticee no. 1 to ensure its presence and argue the case on merit to complete the hearing and that no further opportunity of hearing will be provided in the matter. Subsequently, the AR appeared on behalf of Noticee no. 1 on 23.11.2022 and argued on the lines of the reply already filed with SEBI, contending that SEBI lacks jurisdiction to proceed against Noticee no. 1 and again sought adjournment from hearing on the ground tha....
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....king up a five-year-old matter. c) As a statutory auditor, DCB, upon coming to know of some issues / fraud in ARL, had qualified the quarterly report of ARL for the quarter ending 31-12-2014. This fact was submitted while responding to the interim order, however, it appears that the same has not been considered while issuing the SCN in the matter. d) The seal of DCB and signature of Noticee no. 2 on the multiple financial statements of ARL as referred to in the SCN are forged and don't pertain to the Noticee. e) The references made to various AAS in the SCN have been withdrawn / substituted with different standards. Therefore, the allegations of non-compliance of such AASs are not only baseless but also without application of mind. Submissions by Noticee no. 2 f) Noticee was the first entity to highlight certain irregularities in the Company and raised obvious red flags on irregularities / unusual transactions, by way of disclosure and qualifications in the limited review report for the quarter ended 31-12-2014. The afore said limited review report was heavily qualified with qualifications on stock, debtors and fixed assets etc. Their report w....
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....d documents. Merely because multiple financial statements with varying figures have been unearthed by Forensic auditors, it is not right to conclude that all the sets with varying figures have been signed by the Noticee no. 2 unless and until the signatures are verified by hand writing experts. He has signed only one set of financial statements for the financial year or limited review reports for various quarters on behalf of the firm, which was submitted by the management to NSE / BSE. l) DCB was subjected to Peer review conducted by the ICAI and the file of ARL was reviewed by ICAI and the reviewer reported no exception of any nature. m) Noticee has referred to following judicial decisions in support his submission that no action should be taken against the Noticees as auditors until connivance is found with the management of the Company: Hon'ble Bombay High Court in matter of Tri-Sure India Ltd. vs A.F. Ferguson and Co. and Others [1985 SCC OnLine Bom 342 : (1987) 61 Comp Cas 548]; SEBI order in the matter of Mr. Rashim Tandon (Partner, Deloitte Haskins & Sells LLP) dated August 26, 2021 (Order No.- Order/GR/KG/2021-22/13092) In Kings....
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....gage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person, in connection with the issue, dealing in securities which are listed or proposed to be listed on a recognised stock exchange, in contravention of the provisions of this Act or the rules or the regulations made thereunder; PFUTP Regulations, 2003 3. Prohibition of certain dealings in securities No person shall directly or indirectly- (b) use or employ, in connection with issue, purchase or sale of any security listed or proposed to be listed in a recognized stock exchange, any manipulative or deceptive device or contrivance in contravention of the provisions of the Act or the rules or the regulations made there under; (c) employ any device, scheme or artifice to defraud in connection with dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange; (d) engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person in connection with any dealing in or issue of securities which are listed or proposed to be listed on a reco....
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....ined to ARL and were alleged to have been signed by Noticees are presented in the table below: TABLE NO. 2 Year Sales as reported in Annual Report (INR crores) Sales as per another set of signed financial statements (INR crores) Difference (%) 2010-11 362 27 93% 2011-12 437 41 91% 2012-13 664 38 94% TABLE NO. 3 Year Profit after tax as reported in Annual Report (INR crores) Profit after tax as per another set of signed financial statements (INR crores) Difference (%) 2010-11 16.90 1.23 93% 2011-12 19.41 2.15 89% 2012-13 40.62 2.22 95% 13. From the above two tables, it can be noted that there is a huge difference in the sales and profits figures reported in the Annul reports of ARL vis-a-vis the financial statement unearthed during the Forensic Audit. For instance, sales reported in the Annual Report of ARL for the FY ended March 31, 2013 was INR 664 crores, however, in realty as per another financial statement of ARL, the same was barely INR 38 crores i.e. 94% less than what was reported in the Annual Report. Similarly, profits disclosed in the Annual Report of ARL for the FY en....
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....tatements due to which, they have been served with a SCN from SEBI. However, no such action apparently has been taken by the Noticees to protect their interest and reputation or to prove their innocence, despite the fact that the allegation of signing different sets of financial statements with varying sales / profit figures is a serious allegation of criminal misconduct. Thus, there is no tangible evidence available before me to rely on the claim of innocence made by the Noticees in this regard. In any case, the above allegation is not completely an independent allegation but is arising out of allegation of manipulating the numbers in the financial statement of ARL and as per their admitted averment, the financials disclosed on the website of the stock exchange for the financial years referred to above have not been disputed. In this respect, the forensic audit conducted by PNB has shown that the financials disclosed through the annual report were not true and correct and were containing highly manipulated figures. Therefore, the aforesaid argument of the Noticees does not hold ground for any further consideration and I can't entertain the only ground of protest made by the Notice....
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.... • Matrix Device and Mechanism Private Limited; • Zeal Hi-Tech Engineers Private Limited For the purpose of convenience, the aforesaid entities are together referred to "Controlled / Connected Entities" of ARL. 17. I note from the records available before me that there were frequent bank transfers observed between Controlled / Connected Entities and ARL. I also note that there were regular bank transfers amongst these Controlled / Connected Entities. A few bank transitions noted between ARL and Controlled / Connected Entities as retrieved from the respective bank accounts are tabulated below: TABLE NO. 4 Date Bank Account No. Entity name Counter Party - Connected Entity Debit Amount Credit Amount 05/04/2011 841271906 Preventive Pharmaceuticals Private Limited ARL - 2,11,53,124.00 04/04/2012 0007-W10851-050 Aroma Remedies Private Limited Mascot Machines - 89,40,230.00 04/04/2012 0007-W10851-050 Aroma Remedies Private Limited Elixir life Science - 10,235,950.00 04/04/2012 0007-W10851-050 Aroma Remedies Private Limited ARL 8,735,650.00 - 04/04/2014 602005118....
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.... 25-11-2011 79,05,150 ARL 28-11-2011 70,14,500 ARL 28-11-2011 70,59,150 ARL 01-12-2011 36,40,300 ARL 01-12-2011 36,50,100 ARL 15-12-2011 75,66,200 ARL 15-12-2011 75,50,060 ARL 19-12-2011 75,65,100 ARL 19-12-2011 75,70,600 ARL II - NAME OF THE CONTROLLED / CONNECTED ENTITY: MASCOT MACHINES PRIVATE LIMITED. ACCOUNT NO. 669011000312 BANK NAME- KOTAK MAHINDRA BANK LIMITED DATE CREDIT AMOUNT RECEIVED FROM DATE DEBIT AMOUNT PAID TO 25-11-2011 70,45,500 ARL 25-11-2011 69,25,850 ARL 28-11-2011 68,48,300 ARL 28-11-2011 68,96,250 ARL 29-11-2011 45,12,300 ARL 29-11-2011 45,05,150 ARL 01-12-2011 49,49,500 ARL 01-12-2011 4,950,600 ARL 15-12-2011 54,65,800 ARL 15-12-2011 54,50,950 ARL 21-12-2011 68,54,557 ARL 21-12-2011 68,65,850 ARL III - NAME OF THE CONTROLLED / CONNECTED ENTITY: MATRIX DEVICE AND MECHANISM PVT. LTD ACCOUNT NO. 6311134717 BANK NAME-KOTAK MAHINDRA BANK LIMITED 28-11-2011 65,57,500 ARL 28-11-2011 64,25,100 ARL 01-12-2011 42,12,70....
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....rich Biotech 22-Nov-14 99,76,593 Zurich Biotech transferred to ARL 21. From the aforesaid table, it is noted that the Company had entered into circular transactions with Controlled / Connected Entities in its bank account on various occasions. For instance, on 29.10.2012, ARL transferred an amount of INR 93.41 lacs to one of its Controlled / Connected Entity viz. Elixir and on same day i.e. on 29.10.2012, Elixir transferred an almost equivalent amount i.e. INR 93.28 lacs to another Controlled / Connected Entity i.e. Preventive Pharmaceuticals, which in turn transferred INR 93.18 lacs to ARL on the same day. Similar circular pattern of funds movements has been observed between ARL and its Controlled / Connected Entities on various occasions during the Investigation Period. 22. I also note that though such circular transactions were being shown as purchase and sale transactions in the books of accounts of ARL, however, in effect no real sale or purchase transactions were undertaken by ARL with the said Controlled / Connected Entities, i.e. there were no actual movements of any goods. By the way of the aforesaid circular transactions, Company continuously inflated both ....
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....RL. 24. I note that SCN has referred to paragraphs 7 and 15 of AAS 5 which, inter alia, state that the quality of external evidence is superior to that of internal evidence and when such external evidence is procured directly by the auditor it becomes reliable. SCN has also referred to paragraph 32 of AAS 30 to highlight the point that the said provisions in AAS 30 strictly places the responsibility of sending the letters to outside parties so as to obtain external confirmations of such parties with respect to their transactions on the auditor. SCN alleges that the Noticees had consciously not followed the same responsibility and did not verify with the debtors. In this regard, I note that the Noticees have submitted that the AASs referred to in the SCN were not applicable for the relevant FYs and had been replaced by corresponding SAs as provided in the table below: TABLE NO. 8 AAS SA Date from which the SA is effective 4 240 1/4/2009 5 500 1/4/2009 13 320 1/4/2010 30 505 1/4/2010 25. I have gone through the aforesaid submission of the Noticees and find that the AAS referred to in the SCN have been replaced by corresponding SAs....
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.... "An external confirmation represents audit evidence obtained by the auditor as a direct written response to the auditor from a third party (the confirming party), in paper form, or by electronic or other media." From a bare perusal of the aforesaid SA 500, the importance of external confirmation is clearly evident. However, in the instant case the auditors have not evidently verified the confirmation from debtors, which would have revealed the fact that the realization of the proceeds in the form of sale was nothing but part of inter se circular transactions amongst the Controlled / Connected Entities of ARL. 27. In view of the aforesaid findings and observations, the contentions of the Noticees regarding repealing of AAS's by SA's is nothing but an evasive reply, thereby seeking protection under the shelter of change of auditing standard without realizing that particularly nothing has been changed in substance and in spirit of the earlier standard and even under the revised standard, the liability of a statutory auditor remained same. Therefore, mere mentioning of an old auditing standards that was substituted by a new standard is not a material ground that could be helpful to....
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....ality of services rendered by members of the profession. Further, the inherent limitations of Peer Review, as mentioned in ICAI's website (https://www.icai.org/post.html?post_id=1990), is indicated below: "The reviewer conducts the review in accordance with the Statement on Peer Review. The review would not necessarily disclose all weaknesses in compliance of technical standards and maintenance of the quality of attestation services since it would be based on selective tests. As there are inherent limitations in the effectiveness of any system of quality control which happens to be subject-matter of review, departure from the system may occur and may not be detected" 29. In view of the above, the argument that peer reviewer has not found any exceptions during the peer review of the DCB cannot be used as a defense to conclusively prove that there were no deficiencies on the part of DCB in carrying of audit of ARL particularly when the Forensic Audit has strongly observed the falsification/ misstatement of financial statements of the ARL during the relevant period. Under the circumstances, the said contention does not have a ground to stand on, hence does not require any ....
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....ces expected to be performed by a statutory auditor itself and not about the professionalism required to be shown by a forensic auditor for unearthing a fraud. So, the attempt of the Noticees to highlight the differences between statutory auditors and forensic auditors is irrelevant and unwarranted. 31. I further note that the Noticees have submitted that they had highlighted certain irregularities in the affairs of the Company and raised red flags on irregularities / unusual transactions, by way of qualifications on stock, debtors and fixed assets etc., in the limited review report of the Company for the Quarter ended 31-12-2014. In this regard, I note that, inter alia, following qualifications have been raised by the Noticees in the aforementioned limited review report: • Note no. 3 regarding provision against certain inventories likely to be non usable due to reasons mentioned therein valuing INR 12,617.51 lacs. We are unable to comment on the destruction since the matter is highly technical in nature. In respect of the balance inventories lying at the plant, we are unable to comment on the further losses, if any, on account of similar reasons; • In ....
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.... the matter is highly technical in nature, etc." 33. Noticees have also contended that, had the Noticees been negligent in any manner, professionally or otherwise, they would not have qualified the review report heavily while conducting the limited review, where the scope is much lesser compared to the statutory audit of a complete financial year. Noticees have further submitted that considering the heavily qualified report, DCB was not comfortable to continue with the Company and resigned without doing audit for the year ended 31.03.2015 and in the Form ADT 3 filed with the Registrar of Companies, the same reason was cited by Noticees for resignation. 34. From a conjoint reading of the findings of the Investigation and the aforesaid submissions of the Noticees regarding their Qualified report and the reason furnished by them to ROC while resigning as the statutory auditor of ARL, I find some force in the said submission of the Noticees who have undisputedly reported the said irregularities observed by them in the limited review report on the Company and this fact ought to be given due consideration. 35. I also note that while arguing their role as statutory auditors in ARL, ....
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....hich is available during such inquiry. It is true, as argued by the learned counsel for the petitioners, that the SEBI cannot regulate the profession of Chartered Accountants. This proposition cannot be disputed in any manner. It is required to be noted that by taking remedial and preventive measures in the interest of investors and for regulating the securities market, if any steps are taken by the SEBI, it can never be said that it is regulating the profession of the Chartered Accountants..................... If it is unearthed during inquiry before SEBI that a particular Chartered Accountant in connivance and in collusion with the Officers/Directors of the Company has concocted false accounts, in our view, there is no reason as to why to protect the interests of investors and regulate the securities market, such a person cannot be prevented from dealing with the auditing of such a public listed Company. In our view, the SEBI has got inherent powers to take all ancillary steps to safeguard the interest of investors and securities market. ....." 37. From the aforesaid observations of the Hon'ble High Court of Bombay, it is very much evident that it is wrong to content ....
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....er available on records to point out that there has been gross negligence and dereliction of duty on the part of Noticees. However, at the same time I can turned a blind eye to the fact that the Noticees had issued a Qualified Report highlighting certain irregularities in the financials of the Company that were taken up for limited review for the quarter ended 31-12-2014. The instances of being unprofessional or being negligence would be difficult to equate with committing fraud in connivance with the management, where evidences are not sufficient to demonstrate that the Noticees had actually manipulated the books of accounts with knowledge and fraudulent intention. In the absence of any tangible evidence, the question of fraud committed by the them would be difficult to survive and therefore in the absence of any material to establish knowledge/collusion/connivance of the Noticees with such fraudulent scheme, the Noticee cannot be brought under disciplinary/penal jurisdiction of SEBI. Further, with respect to any possible connivance or collusion by the Noticees with the Company or its management, it is acknowledged that, in such matter it is very difficult to find out either a wri....