The Securities Appellate Tribunal ( SAT ) has ruled that, SEBI has not empowered to take action against Chartered Accountant for Professional Negligence.
The Appeal has been filed by CA Mani Oommen against the order dated December 31, 2019 passed by the Whole Time Member of Securities and Exchange Board of India whereby the appellant who is a statutory auditor / chartered accountant has been prohibited from issuing any certificate of audit and has been restrained from rendering any other auditing services to any listed companies and intermediaries for a period of one year.
The facts leading to the filing of the present appeal is, that pursuant to an investigation a common show cause notice was issued to Deccan Chronicle Holdings Ltd, its promoters, directors and to the appellant who is a chartered accountant and a partner in M/s. C. B. Moulli & Associates, statutory auditor of the company in which it was alleged that the company had understated its outstanding loans to the tune of Rs. 1339.17 crores in the year 2008-09 and had also wrongly disclosed the difference between the actual and reported outstanding loans for the financial years 2009-10 and 2010-11. It was also alleged that the company had manipulated its financials and failed to make necessary disclosure and that the promoters of DCHL who are also the owner of the Deccan Chronicle Marketers had wrongly transferred loans on the last day of the financial year and reverting it on the first day of the financial year, thus, giving misleading financial information.
We find that the A.O. has only found that due diligence was not carried out by the appellant. There is no finding that the appellants were instrumental in preparing false and fabricated accounts or have connived in preparation or falsification of the books of account. There is no finding that the appellants had manipulated the books of accounts with knowledge and intention, in the absence of which, there is no deceit or inducement by the appellants. In the absence of any inducement, the question of fraud committed by the appellants does not arise. This Tribunal in Price Waterhouse (supra) has categorically held that a C.A. can be proceeded against them if they are instrumental in preparing false and fabricated accounts otherwise SEBI has no power to proceed against them.
The SAT bench comprising of Presiding Officer Justice Tarun Agarwala and Judicial Member Justice M. T. Joshi has observed that, “A.O. has only found that due diligence was not carried out by the appellant. There is no finding that the appellants were instrumental in preparing false and fabricated accounts or have connived in preparation or falsification of the books of account. There is no finding that the appellants had manipulated the books of accounts with knowledge and intention, in the absence of which, there is no deceit or inducement by the appellants. In the absence of any inducement, the question of fraud committed by the appellants does not arise.
Relying the Judgment of Bombay High Court In Writ Petition no. 5249/2010 Price Waterhouse Co. Vs SEBI, the question raised was whether SEBI has power to issue a show cause notice to the Charted Accountants in connection with the work which they have undertaken for a listed company in a matter of maintaining accounts and balance sheets. It was urged that SEBI had no jurisdiction to proceed against the Charted Accountants who are members of the C.A. Institute and therefore SEBI lacked inherent jurisdiction to inquire into the conduct of the C.A.s who are professionals.
The Tribunal also said that, “Section 12A(a) & (b) of the SEBI Act is obviously not applicable to the appellant as they are not dealing in the securities. Similarly, Section 12(c) cannot be made applicable because no fraud has been carried out by the appellant. Further, in the absence of connivance, deceit, or manipulation Regulation 3 & 4 of the PFUTP Regulations cannot be made applicable”.
“In our opinion, in order to give a finding on collusion, there must be some material which could lead to an inference of collusion. Once a finding is given that the appellant was not involved in the fabrication and fudging of the books of accounts and the balance sheet and if the appellant had no intention or knowledge of such understatement being shown in the financials, the charge of fraud or collusion or connivance with the directors and promoters of the company cannot be levied, only on the ground that he was not diligent or cautious or did not check the outstanding loan details from the banks and through other sources. Lack of due diligence can only lead to professional negligence which would amount to a misconduct which could be taken up only by ICAI, the Tribunal also added.
Advocates Chetan Kapadia, Rahul Sarda, Seshachalam, Sabeena Mahadik, Aayush Kothari and Sagar appeared for the appellant.
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