SEBI bars Price Waterhouse and related firms from audit of listed companies, compliance of obligations of such cos. and intermediaries
Securities and Exchange Board of India (SEBI) on the basis of email received in 2009 from from Mr. B. Ramalinga Raju, had carried out an investigation into the affairs of Satyam Computer Services Limited (‘SCSL’). The then Chairman of SCSL had admitted and confessed large scale financial manipulations in the books of account of SCSL.
The statutory auditor of SCSL from April 1, 2000 was Price Waterhouse, Chartered Accountants.
The investigation found that certain directors and employees of SCSL had connived and collaborated in the overstatement, fabrication, falsification and misrepresentation in the books of account and financial statements of SCSL. The published books of account of SCSL contained false and inflated current account bank balances, fixed deposit balances, fictitious interest income revenue from sales and debtors’ figures and for several years. The investigation also noted that the statutory auditors of SCSL had connived with the directors and employees of SCSL in falsifying the financial statements of SCSL.
The board of Price Waterhouse Coopers International Limited had approved 11 partnership firms consisting of various Chartered Accountants as their partners to use the name ‘Price Waterhouse’ in India. CA partners/employees in any of said eleven firms were involved in the audit of SCSL in which Price Waterhouse was appointed as auditor. Most of the ‘engagement team’ members which worked on the audit of SCSL was on the payroll of Price Waterhouse and Lovelock and Lewes, Kolkata.
Writ Petitions were filed before the Hon’ble High Court of Bombay for quashing the proceedings initiated on the ground that SEBI lacked jurisdiction to issue the notices in the matter as by doing so, it was encroaching upon the jurisdiction of ICAI. The Hon’ble High Court rejected these Writ Petitions holding that the show cause notices issued by SEBI had not been issued in excess of jurisdiction.
While passing the order, Shri G. Mahalingam, the whole time member of SEBI observed that the process of affiliation by the individual firms that are registered with ICAI with the global Price Waterhouse (PW) to obtain its affiliation, does not define the inter se rights and obligations of individual firms forming part of the network nor those between the PWCIL vis-à-vis an individual firm. PW India and the firms in its network share the benefits arising out of the brand name and the resources depending on the arrangements/agreements inter se the firms. The brand PWC holds the partner firms in a loose-knit network arrangement, enabling each firm to derive the advantages of the brand value and the synergy without laying down any supervisory mechanisms.
He went on to observe that having taken into account, all the factors relating to the manner in which various firms in India get registered with ICAI showing the name PW (bearing different registration numbers) and the nebulous way in which they are present in various parts of the country, it becomes difficult for me not to take note of the loss of faith of the investors in the brand name, the directions in the instant case ought to be aimed at the particular Network that was responsible for the fraud in SCSL.
In exercise of the powers conferred under sections 11 and 11B of the SEBI Act, and Regulation 11 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to the Securities Market) Regulations, 2003, read with section 19 of the SEBI Act, 1992, the following directions have been passed by Shri G. Mahalingam, the whole time member of SEBI:
i Entities/firms practicing as Chartered Accountants in India under the brand and banner of PW, shall not directly or indirectly issue any certificate of audit of listed companies, compliance of obligations of listed companies and intermediaries registered with SEBI and the requirements under the SEBI Act, 1992, the SCRA 1956, the Depositories Act, 1996, those provisions of the Companies Act 2013 which are administered by SEBI under section 24 thereof, the Rules, Regulations and Guidelines made under those Acts which are administered by SEBI for a period of two years.
ii CA S Gopalakrishnan and CA Srinivas Talluri, shall not directly or indirectly issue any certificate of audit of listed companies, compliance of obligations of listed companies and intermediaries registered with SEBI and the requirements under the SEBI Act, 1992, the SCRA 1956, the Depositories Act, 1996, those provisions of the Companies Act 2013 which are administered by SEBI under section 24 thereof, the Rules, Regulations and Guidelines made under those Acts which are administered by SEBI for a period of three years.
iii M/s. Price Waterhouse, Bangalore along with CA S Gopalakrishnan and CA Srinivas Talluri shall be liable, jointly and severally, to disgorge the wrongful gains of Rs. 13,09,01,664/- with interest calculated at the rate of 12% per annum from January 07, 2009 till the date of payment. They shall pay the said amounts within 45 days
iv Listed companies and intermediaries registered with SEBI shall not engage any audit firm forming part of the PW Network, for issuing any certificate with respect to compliance of statutory obligations which SEBI is competent to administer and enforce, under various laws for a period of two years.
However it has been clarified that this order will not impact audit assignments relating to the financial year 2017-18 undertaken by the firms forming part of the PW network.
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