Sebi action against an auditor

A lot has happened since this column spoke about some extreme, unnamed, examples of auditor conduct and how the system of probes needs an overhaul (https://www.business-standard.com/article/markets/reforms-in-audit-probes-a-new-year-wish-116010400684_1.html).

The Institute of Chartered Accountants of India (ICAI) has sought to distance itself from such conduct and listed various actions it took in disciplining wayward members. A new president has taken over there and, in a speech right after taking the oath of office, underlined the need for restoring trust in the profession. An experts panel on company law has recommended the formation of a National Financial Reporting Authority, an independent body that would regulate financial reporting.

Amid these, the Securities and Exchange Board of India (Sebi) fired a fresh salvo. In an order on February 17, wholetime member Rajeev Kumar Agarwal prohibited Shashi Bhushan, proprietor of audit firm Bhushan Aggarwal & Co from, directly or indirectly, issuing any certificate required under the securities laws and parts of certain other laws administered by Sebi for a period of one year.

This order related to a listed realtor named Ritesh Properties and Industries. Its shares had shot up from Rs 3.52 apiece to Rs 123.50 between 2006 and 2008. The company had recognised a huge amount of revenue, claiming construction of projects. In 2009, it wrote back all of it.

The Sebi order explains various irregularities during 2006-08, such as fraudulent omission to disclose the change in the methodology of recognition of revenue, fraudulent inclusion of land as fixed assets, fraudulent omission regarding unsecured loan taken and repaid from related companies and directors, and other discrepancies in the accounting policies ot the company, fraudulently certified by the auditor. These came to light in a special examination conducted by an independent CA appointed by Sebi. The report came to Sebi on November 16, 2010.

The false and misleading disclosures in financial statements as found in this case are not only detrimental to the interests of investors but also endanger integrity of the securities markets, the regulator said. “This is also a fit case where Sebi needs to send a stern message to professionals who associate themselves with the securities market, so as to prevent them from indulging in such acts of omissions and commissions as found in this case.”

In a blogpost last week, senior CA and securities law expert Jayant Thakur identified this as the first instance of Sebi debarring an auditor. Adding, “It is not uncommon for Sebi to find companies/intermediaries engaging in accounting irregularities. This order may become one of the first of many such orders in the future.”

Coincidentally, in August 2010, the Bombay High Court had dismissed a petition by Price Waterhouse challenging the jurisdiction of Sebi, saying it was infringing the turf of ICAI. “If ultimately any decision is taken by debarring any particular person from auditing the books of a listed company, such direction can always be said to be within the powers of Sebi and that is in the aid of regulating the affairs in connection with investors' interests and the interest of the securities market,” the court had then held. By exercising such powers, it cannot be said that Sebi trying to regulate the profession of CAs in any manner, it had said.

Despite such clear pronouncements, the Sebi order took more than five years since the CA’s report — proceedings against the company and related hearings were concurrently on. However, better late than never.