In an order passed on January 10, the Whole-time member of SEBI has prohibited 11 accountancy firms associated with the U.K. based company – PricewaterhouseCoopers (PwC firms), from issuing a certificate of audit for 2 years to the public companies listed on any recognized stock exchange in India for violating the provisions of SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003 (FUTP Regulations). It was held that PwC Bangalore and its partners’, acting as statutory auditors of Satyam Computer Services Limited, between 2001 and 2008, failed to identify the financial fraud and manipulation of books of account of Satyam and did not observe the minimum standards of professional duty during the audit process, thereby assisting Satyam to commit the financial fraud.
Some of the important observations made under the order are: (i) Auditors have a duty towards the public at large, who rely on their representations to make financial decisions. (ii) External independent resources are more reliable than audit evidence obtained from within the company. (iii) The discretion of an auditor to obtain information from independent sources is not ‘unfettered’ and must be exercised to complement the objective of an audit. (iv) An auditor must work with an attitude of ‘professional scepticism’ and should not accept information without testing its veracity. (v) While undertaking the audit, the accounting standards prescribed by the Institute of Chartered Accountants of India must be strictly observed. It was thus held that the PwC firms had violated Regulations 3 and 4 of the FUTP Regulations by employing schemes to defraud the participants of the securities market, publishing reports which were not true and undertaking other such unfair trade practises.
Section 147(5) of the Companies Act, 2013, provides for the joint and several liabilities of the partners along with the accounting firm for non-compliance with Chapter X of the Act dealing with ‘Audit and Auditors’. However, even the said provision does not empower the courts / tribunals to hold the sister entities of the accounting firm liable for the latter’s misconduct. This is the first such order wherein the associate entities have been held liable for the auditor’s negligence. Such a blanket ban may set a wrong precedent wherein an entire network of firms and their partners may be penalised for the wrongful acts of few.
