SEBI

Can SEBI debar an Auditor from Auditing?

In the article, we will focus on whether SEBI has the authority to debar an Auditor from Auditing.

What is SEBI and does it hold the power to debar an Auditor?

Securities and Exchange Board in India was established on 12^th April 1992, under the SEBI Act, 1992^[1] and is headquartered in Mumbai. Along with it’s headquarter it has many regional offices in the metropolitan cities (Ahmedabad, New Delhi, Chennai and Kolkata) of the country. It also has many other local, regional offices in prominent cities around the country.

SEBI is a supervisory body given the responsibility to control the capital markets and put into effect the rules to regulate and monitor the security market and to protect the interest of the investors. The other purpose of SEBI was to prevent malpractices and to promote development in the Indian capital market.

The answer to the question whether SEBI can debar an auditor or not will be discussed later in the article.

Who is an auditor and the process to debar an auditor?

An Auditor is a person who is authorized to review & verify the correctness of an individual or company’s financial records and ensures that they comply with tax laws. An audit is a process that includes an examination of accounts, books, records or various other documents.

The auditor will examine the documents to verify that all the reports are accurate and are free from any misstatement. They protect the business from fraud; spot the discrepancies in the accounting methods, and help the firm boost its efficiency.

There can be two kinds of auditors:

1. Internal auditors: The Company or the firm hires these to provide in-house, they evaluate the financial operations, including corporate governance, as per the procedures laid down by the company.
2. External auditors: These are the public accountants who perform an audit on an organization from an independent position. The accounting firms hire them.

There is no such process to debar an auditor but the bodies that can debar will be discussed in this article later.

Why is Auditing important?

An audit has its importance as it provides reliability to a set of financial statements, and it gives the shareholders assurance that the accounts are accurate and fair.

Auditing is used to verify financial statements, balances and accounts as per the accounting standards. It also helps in cash verification and other assets.

Audits are performed to ensure that the financial statements are prepared pursuant to the accounting standards. The three primary financial statements:

• Income statement
• Balance sheet
• Cash flow statement.

Auditing is important so that a company can provide with its fair and accurate financial position which must be in accordance to the accounting standards.

What are the bodies that can debar an auditor?

• Comptroller and Auditor General of India (CAG)

It is an authority that provides all the receipts and expenditure of India’s government and maintains the accounts. The CAG also acts as an external auditor of state-owned corporations. It conducts audits of government companies (including non-banking / non-insurance company holding at least 51% of the central government’s existing or subsidiaries of the central government.)

The CAG report is considered by the Committees of Public Accounts Committees (PACs) and Public Undertakings (COPUs), which are specialized in India’s Parliament and State Legislatures.

• Institute of Chartered Accountants of India (ICAI)

It was established by an act of Parliament in 1949 under the Chartered Accountants Act in India to regulate the accountancy profession.

ICAI determines the eligibility for a CA and provides for necessary examinations and grants licenses in the form of COP (Certificate of Practice).

ICAI is also the regulatory body to take action against any CA or auditors or the auditing firms.

Basic Principles governing an audit process

• Independence, integrity and objectivity
• Skill and competence
• Documentation
• Audit evidence
• Audit conclusions and reporting
• Accounting systems and internal controls
• Planning
• Work performed by others
• Confidentiality.

Can SEBI debar an auditor?

In 2018, SEBI had to debar an auditor from Price Waterhouse Coopers (PwC) for two years from auditing any listed company or firm for its role in the Satyam Scam. SEBI used its powers conferred under Sections 11 & 11B of the SEBI Act to protect investors’ interest. The audit firm approached the SAT (Securities Appellate Tribunal) to quash SEBI’s order of banning PwC from Auditing. The SAT held that the SEBI has no power over the auditors. SEBI then approached the Supreme Court in November requesting to reinstate the deal. The Supreme Court also stayed the SAT’s order and held that SEBI doesn’t have the power to bar auditors.

SAT also observed that under Section 11 and 11 B, powers conferred to the SEBI is to protect the investors’ interest and promote the development of the securities market. Thus, the SEBI cannot debar an auditor because this is beyond the scope and powers of SEBI under sections 11 & 11B of the SEBI Act. Such directions can only be remedial and not punitive, and debarring PwC is not remedial; it is punitive. Thus, the action of SEBI to debar an auditor from PwC is not within its power.

The tribunal also held that the power to debar an auditor lies only within ICAI (Institute of Chartered Accountants).

Conclusion

Auditing is essential because it provides reliability to a set of financial statements, and it gives the shareholders assurance that the accounts are accurate and fair.

As per the powers conferred to it, SEBI cannot debar an auditor or auditing firms, and ICAI is the only regulatory body to take action against the Auditors or the Auditing firm.

Read our article: All about SEBI (ICDR) (Amendment), Regulations, 2021