Why auditors need strict regulations

Coming back to the Supreme Court’s decision of May 3, 2023, this essentially makes the second caveat of Section 104(5) applicable to IFIN – that is, it imposes a five-year ban on the KPMG subsidiary and Deloitte.

The first caveat provides that an auditor may be removed from a company if found to be involved in corporate fraud. Both lifting and imposition of a ban is done through the NCLT process and was introduced in the Companies Act 2013. The inclusion of the first caveat was initiated by the Companies Bill of 2009 and the second caveat in the Companies Bill of 2011. The aim was to make the supervision of auditing and auditors “tighter” through a fair process (NCLT process).

These changes were mostly due to the Satyam Computers scam in 2009.

Remember the scale of audit failures at the legendary Satyam Computers.

Satyam Computers collapsed overnight in 2009 after the man behind it, Ramalinga Raju, wrote to SEBI and confessed that he had been manipulating the accounting and financial books for seven long years! In his letter he mentioned (a) “non-existent” bank deposits and accrued interest, (b) “undervalued liabilities” and (c) “overvalued debtor position”. Even a CA student doing an articleship would have discovered the scams by completing a very simple and basic task – matching Raju’s claims about bank deposits with actual bank statements in one of those seven years. But its auditor, famed global giant PricewaterhouseCoopers (PwC), has failed to do that basic job for seven years.

PwC was banned (along with the skimming) by the SEBI for two years in 2018 – 10 years later.

The ban was lifted by the Securities Appellate Tribunal (SAT) in 2019. This was overturned by the Supreme Court, which upheld SEBI’s power to punish the auditor. In a parallel move, in February 2023, the SAT lifted the SEBI orders (dating from 2018) that barred Raju and others from entering the securities markets for up to 14 years — 14 years after the fraud broke out. Meanwhile, the CBI case against Raju and others drags on while they are out on bail.