SAT sets aside SEBI order barring PricewaterhouseCoopers firms for alleged role in Satyam fraud

The Securities Appellate Tribunal (SAT) has set aside a 2018 order of the Securities Exchange Board of India (SEBI) barring the operation of accounting firms under the PricewaterhouseCoopers aegis..The order was passed by a Bench of Presiding Officer Justice Tarun Agarwala and Member Dr. CKG Nair..In January 2018, SEBI had barred global accountancy firm PricewaterhouseCoopers and its network entities from issuing audit certificates to any listed company in India for two years..The regulator had also asked PwC to pay Rs 13.09 crore, along with interest at 12% per annum from January 2009 (approximately Rs 14 crore) for wrongful gains. Two former PwC partners – S Gopalakrishnan and Srinivas Talluri – were also barred from issuing audit certificates to listed companies for three years..The 2018 SEBI order stems from the Satyam scandal of January 2009. The order came nine years after the scam at Satyam Computer Services Limited (SCSL) came to light and after two failed attempts by PwC to settle the case through the consent mechanism. On January 7, 2009, Chairman of Satyam Software Services Ramalinga Raju confessed to a Rs. 7,136 crore fraud committed by him and a few others at the company..In February 2009, SEBI had issued show cause notices to the PricewaterhouseCoopers firms directing them to show cause as to why directions under Section 11, 11(4) and 11B of the SEBI Act should not be issued for violation of provisions of the SEBI Act and the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003..Subsequently, petitions were moved before the Bombay High Court in 2010, challenging the jurisdiction of the SEBI to issue show cause notices against the firms. However, the High Court had dismissed the petitions, stating that the jurisdiction of SEBI would depend upon the evidence gathered during the investigation and that only if there was some omission without any mens rea or connivance with anyone would the SEBI be barred from issuing any further directions..Further, as per the directions of the Bombay High Court, the scope of inquiry was restricted only to the charge of conspiracy and involvement in the fraud and not to any charge of professional negligence..In the challenge before the SAT, the petitioners contended that the order is manifestly erroneous in law and that the directions issued by the Bombay High Court were totally disregarded..On the aspect of mens rea on the part of the accounting firms, the SAT held,.“Thus, pinning down the engagement partners and the audit firms on a preponderance of probabilities that they had committed a big fraud in a reckless and careless manner cannot in our view lead to a conclusion that there was any intention or mens rea on their part. The High Court was very clear and categorical that SEBI could only proceed under the SEBI laws only if there was a specific finding of mens rea against the engagement partners and / or the audit firm.”.While allowing the appeals filed by PricewaterhouseCoopers, the SAT Bench observed that not even a whisper of evidence of collusion by auditors was on record. Stating that the audit firms had no role to play in the Satyam fraud, the Tribunal stated that banning them was not justified. The order states,.“There is no evidence to indicate that the ten firms had any role to play in the audit of SCSL. These ten firms had nothing to do with the audit of SCSL. They had no knowledge of the day to day affairs of SCSL either directly or indirectly. There is not even a whisper of a finding in the impugned order against the ten firms about any connivance or collusion or intention or knowledge on their part in the audit of SCSL.”.The SAT went on to hold,.“We find that there is no direct evidence to show that the engagement partners/audit firms/other PW firms were directly involved in the fabrication of the books of account of SCSL. In fact, the Chairman of SCSL has gone on record in so many words that the statutory auditors were kept in the dark and that they had no role to play in the fudging of the books of account.”.On the issue of liability of auditors, the SAT held,.“In our view, action against a Chartered Accountant can be taken only in terms of Chartered Accountants Act, 1949. SEBI cannot in the garb of proving conspiracy and connivance on the part of the Chartered Accountant interpret the auditing standard on a standalone basis. The auditing standards can only be related to the professionalism of a Chartered Accountant vis-à-vis its professional misconduct which can only be considered by the ICAI.”.Thus, the SAT quashed the order of the SEBI barring the accounting firms and the two partners from auditing listed companies..Zerick Dastur Advocates and Solicitors represented Pricewaterhouse & Co and other related entities before SAT in the appeal filed against the SEBI order. Senior Counsel Mukul Rohatgi, Janak Dwarkadas, with Advocates Somasekhar Sundaresan and Zerick Dastur appeared for the PwC accounting firms. Solicitor Berjis Desai also advised the firms. Ruby Singh Ahuja and Anupam Prakash from Karanjawala & Co also represented the appellants..Zerick Dastur Advocates and Solicitors represented Pricewaterhouse Bangalore before SAT in the appeal filed against the SEBI order. Senior Counsel Shyam Mehta, with Advocate Zerick Dastur, and Archana Uppuluri, Kunal Kothary, Palak Agrawal and Khushil Shah..Argus Partners represented the partners of PricewaterhouseCoopers K Gopalakrishnan and Srinivas Talluri through a team led by Senior Partner R Sudhinder along with Managing Associate Prerana Amitabh and Associate Vatsala Pant. Senior Advocates Gaurav Joshi and Mustafa Doctor appeared for the partners..Senior Counsel Ravi Kadam and Kevic Setalvad appeared for SEBI. They were briefed by K Ashar & Co..Read the order:.Bar & Bench is available on WhatsApp. For real-time updates on stories, Click here to subscribe to our WhatsApp..Follow Bar and Bench channel on WhatsAppDownload the Bar and Bench Mobile app for instant access to the latest legal news.