Mumbai, October 6, 2017
A Committee on Corporate Governance formed by the Securities and Exchange Board of India (SEBI) has proposed that the capital market regulator should have clear powers to act against auditors and other entities that have a statutory duties under the securities regulations.
This recommendation assumes significance as SEBI is in the midst of a legal battle with Price Waterhouse for the audit firm's alleged role in the matter related to the erstwhile Satyam Computer Services and the jurisdiction of the market regulator.
This is also perhaps the first time that a SEBI committee has formally stated that auditors should come under the regulatory purview of the capital market regulator. The recommendation is part of the overall proposals related to 'Strengthening Monitoring, Oversight and Enforcement by SEBI'.
“Given SEBI’s mandate to protect the interests of investors in the securities market and regulating
listed entities, the Committee recommends that SEBI should have clear powers to act against
auditors and other third party fiduciaries with statutory duties under securities law,” stated the 177-page report that was submitted to SEBI on Thursday.
“This power ought to extend to act against the impugned individual(s), as well as against the firm in question with respect to their functions concerning listed entities. This power should be provided in case of gross negligence as well, and not just in case of fraud/connivance,” said the report while adding that the recommendation can be implemented after consulting other relevant stakeholders as well.
Meanwhile, the report has highlighted the fact that the Bombay High Court, in its order, had said that “... In a given case, if there is prima facie evidence in connection with the conduct of a Chartered Accountant such as fabricating the books of accounts, etc., the SEBI can certainly give appropriate direction not to utilize the services of such a Chartered Accountant in the matter of audit of a listed Company.”
In 2010, SEBI issued a show-cause notice to Price Waterhouse, among many other entities, after it emerged that the accounts of Satyam were falsified and inflated. The audit firm, however, filed a petition challenging the show-cause notice and the jurisdiction of SEBI over audit firms that are regulated by the Institute of Chartered Accountants of India (ICAI).
The case then went on to the Supreme Court, which in January, directed SEBI to expedite the enquiry against the audit firm and conclude the probe within six months.
Interestingly, The Institute of Chartered Accountants of India (ICAI), which was represented on the committee by its president Nilesh Vikamsey, has objected to this recommendation.
“The ICAI has expressed its dissent on the... recommendation as the regulation of chartered accountants is covered under the Chartered Accountants Act, 1949 and to avoid jurisdictional conflict and other issues,” said the report.
The committee, however, has also recommended strengthening the role of ICAI in punishing a member or imposing monetary penalties on audit firms. It has recommended increasing the maximum penalty from the current Rs.5 lakh to up to Rs.1 crore on a member. It has further proposed punishment or impose penalties up to Rs.5 crore on the audit form in case of repeated violations.
ICAI, however, was of the view that this recommendation was outside the scope of the terms of reference of the committee and that it has already taken up most of these issues at appropriate levels.
These recommendations are part of a slew of proposals related to the role of independent directors, composition of the board of the company, oversight by audit committees and disclosure norms for listed companies.