SAT quashes Sebi's order against Price Waterhouse in Satyam scandal

In a major relief to Price Waterhouse (PW), the Securities Appellate Tribunal (SAT) on Monday quashed the order passed by the Securities and Exchange Board of India (Sebi) against the global audit firm for its role in the decade-old Satyam scandal.

In January 2018, Sebi had issued an order banning PW, an affiliate of PwC, and two of its auditors from providing audit services to listed companies and market intermediaries for two years for their involvement in the multi-crore accounting scam at the Ramalinga Raju-promoted company. The scandal involving overstatement of bank and cash balances had come to light in January 2009. PW had moved the SAT against the Sebi order in January last year and, after a series of hearings, the tribunal passed the final order in the matter on Monday.

The Sebi order “debarring the PW firms as well as the two auditors from auditing listed companies cannot be sustained and is quashed. Directions to listed companies not to engage any audit firm forming part of the PW network are also quashed,” said SAT members Tarun Agarwala and C K G Nair in a 125-page order.

The SAT, however, maintained the Rs 13-crore disgorgement order stating, given the lapses and negligence, PW wasn’t justified in retaining the fee it earned from Satyam.

“There is no doubt that there has been a professional lapse on the part of the auditors in conducting the audit, especially their failure to seek direct confirmation from the bank relating to bank balances and fixed deposits. These lapses amounted to negligence. Action has already been taken by the Institute of Chartered Accountants of India (ICAI) against the auditors,” the SAT order stated.

What went in PW’s favour

• Huge time (nine years) taken by Sebi to complete the proceedings in the Satyam matter
• PW’s “blemish-free” record since the scam came to light
• “Extensive remedial measures” adopted by PW following SEC, PCAOB orders
• Over 70% of partners at PW came on board after 2009
• Action against entire PW network for wrongdoing of a few not justified
• Action taken by ICAI against auditors in the matter

The action taken by Sebi had triggered a debate on whether the market regulator was encroaching upon the rights and powers of the ICAI provided under the Chartered Accountants Act.

Sebi had passed the order against PW and its auditors under the special powers conferred upon it to protect the interests of investors in the securities market. As a result, the SAT held that the order was “remedial” and not “punitive” and debarring an entire audit firm wasn’t justified.

“By no stretch of the imagination, can a direction debarring an auditor from auditing the books of a listed company be said to be remedial in nature. A remedial action is to correct a wrong, or a defect. Preventive measure can be issued in a given case of unfair trade practice or where fraud is proved. However, in the instant case, the direction to debar the auditor from auditing the books of a listed company is neither remedial nor preventive,” said the order.

The SAT also said the long delay in passing the final order in the Satyam matter was also unfair to the audit firm. “The show cause notice was issued on February 14, 2009 and August 26, 2009. The impugned order was passed on January 10, 2018. It took Sebi nine long years to complete the proceedings and the fault lay entirely with Sebi.”

The tribunal came down heavily for barring the entire PW network or the brand. SAT observed that the majority of the partners at PW firms had come in board only after 2009.

“As on the date of the impugned order there were 98 partners in the 10 firms, out of which 70 are new partners who were not partners of the PW firms during the period 2000–2009. Thus, banning them from doing audit work of listed company, merely because they are presently partners in PW firm, is in complete violation of Section 31(2) of the Partnership Act,” the tribunal held.

The SAT said during the pendency of the proceedings in the Satyam matter, the PW firms carried on their business and auditing listed companies to the satisfaction of the shareholders and investors “without any blemish.”

The tribunal observed that PW had adopted “extensive remedial measures” as part of the settlement orders passed by US regulators Securities and Exchange Commission (SEC) and Public Company Accounting Oversight Board (PCAOB).

“The independent monitors appointed by SEC and PCAOB have certified that remedial measures have been successfully implemented, meaning thereby that the audit quality met with the requisite standards. Thus, looking from this angle also, the order of debarment was not the appropriate choice.”

Sebi might move the Supreme Court against the order passed by the SAT. Sources said the regulator is worried that its jurisdiction for acting against auditors could be challenged following the latest order. Sebi is of the view it has entirely justified for taking action against audit firms when it comes to auditing listed companies to protect minority shareholders’ interest.

“The order raises an important jurisdictional point. At present, the National Financial Reporting Authority is not fully functional. Even assuming it was the jurisdictional issue will still crop up when it comes to action taken against auditors by Sebi or the RBI. Almost certainly, the SC will have the final word on this,”said Sandeep Parekh, partner, Finsec Law Advisors.

Legal experts believe Sebi may have to come up with a better legal strategy when it comes to going after audit firms.

“Anyone adversely impacting the transparency of the securities market should be under Sebi’s scanner. However, Sebi may be required to come up with a better legal strategy to go after entities such as the auditors, who are under the purview of Section 140 of the Companies Act and the Chartered Accountants Act. Sebi needs to identify in a much more granular way the exact violation and the punitive action,” said Vidisha Krishan, partner, MV Kini & Co.