SEBI Debars Auditor

In an order dated 17^th February 2016 Whole Time Member of Securities and Exchange Board of India, debars an auditor (Chartered Accountant is this case) from issuing any certificate. SEBI held that the Auditors had aided and abetted the Company in committing the alleged fraud.

The whole time member of SEBI wrote whiling writing the order:

“in order to protect the interest of investors and integrity of the securities market, in exercise of the powers conferred upon me under section 19 of the Securities and Exchange Board of India Act, 1992 read with sections 11 and 11B thereof, and regulation 11 of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 hereby prohibit Shri Shashi Bhushan, Proprietor of M/s. Bhushan Aggarwal & Co. from, directly or indirectly, issuing any certificate required under securities laws namely Securities Board of India Act, 1992, the Securities Contract (Regulations) Act, 1956, the Depositories Act, 1996, Rules, Regulations, Guidelines made thereunder, the Listing Agreement and the applicable provision of the Companies Act, 2013, the Rules, Regulations, Guidelines made thereunder which are administered by SEBI, with respect to listed companies and the intermediaries registered with SEBI for a period of one year.”

Facts and Findings

Securities and Exchange Board of India conducted investigations into the dealings of the scrip of the Company for the period July 14, 2006 to May 20, 2008.

SEBI appointed an independent Chartered Accountant to conduct special examination of the books of accounts of the Company and other relevant records for the ten quarters from September 2006 to December 2008 and for the examination of the revenue figures reported by the Company from the real estate sales and to determine its impact on the financial statements. The Report of the independent Chartered Accountant was submitted to SEBI on November 16, 2010. It was observed from the analysis of the Report that the Auditor had fraudulently certified the Annual Report, which it did not believe to be true and had fraudulently caused the Annual Reports of the relevant period to be published with untrue information, in spite of presence of unusual features in the accounts of the Company.

This 25 pages order lists instances of alleged act of:

• Fraudulent misrepresentation regarding the Pooling of land and Collaboration agreement
• Fraudulent recognition of revenue
• 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
• Other discrepancies in the Accounting Policies adopted by the Company which were fraudulently certified by the Auditor.

Accordingly, Full Time Member of SEBI find that material available on record are sufficient to establish contravention of regulation 4(2) (k) of the PFUTP Regulations. However, contraventions of the provisions of section 12A (a), (b) and (c) of SEBI Act, 1992 read with regulations 3(b), (c) and (d), 4(1) and 4(2)(e) and (r) of the PFUTP Regulations as alleged in the respective SCNs by Shri Shashi Bhushan, Proprietor of M/s. Bhushan Aggarwal & Co. have been established on the basis of preponderance of probability.

Analysis

The IndiaCorpLaw blog, which reported this order earlier noted Some aspects need attention:-

–    the prohibition is on issue of certificates and not reports.

–    The certificate may be under the specified securities laws, viz., SEBI Act, SCRA and Depositories Act and the rules, regulations and guidelines issued thereunder.

–    The certificate may be even under the and the applicable provision of the Companies Act, 2013, the Rules, Regulations, Guidelines made thereunder which are administered by Securities and Exchange Board of India.

–    The certificate must be required under the said specified laws.

–    The certificates may relate to listed companies as well as intermediaries registered with SEBI.

Stern message Professionals

This is first time when market regulator debarred an auditor but may have far reaching effect for all professionals issuing certificates and reports, including company secretaries and cost accountants.

SEBI also observed that that disclosure of true and fair information is crucial for inventor protection and to maintain and restore their confidence in the securities market. 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. This is also a fit case where SEBI needs to send a stern message to professionals who associate themselves with securities market so as to prevent them from indulging in such acts of omissions and commissions as found in this case.

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