Sebi bans PwC for 2 years: Has market regulator overstepped its mandate with the crackdown?

Hauling professionals over coals gives perverse pleasure to the lynch mob, especially when they happen to be doctors or chartered accountants (CAs). Both serve the public more fully and intimately than advocates whose fancy fees are often talked about in awe and sometimes in anger. But common folks seldom get to rub shoulders with them unless they are dragged to court. CAs and doctors, however, cannot be avoided because taxes and death cannot be avoided! Arthur Andersen, one of the then big five auditing firms, was banned for lifetime in 2002 following its ignominious role in shredding evidence against Enron and its promoter Kenneth Lay. The bar has not stopped its non-culpable partners from practicing under different banners and avatars. Closer home, the Sebi has banned for two years PricewaterhouseCoopers (PwC) for its convenient ‘look the other side’ policy when Satyam Computers promoter B Ramalinga Raju went on a rampage to the extent of forging bank fixed deposit receipts to explain the inflated sales and the resultant inflated profits to impress foreign investors. In addition, it has also put the two partners who were directly complicit in the shenanigans, Srinivas and Talluri, in a permanent doghouse. [caption id=“attachment_185153” align=“alignleft” width=“380”]  PricewaterhouseCoopers International. Reuters[/caption] What has raised eyebrows is the order to disgorge around Rs 13 crore plus interest at 12 percent per annum Sebi has slapped jointly and severally on the firm and the two culpable partners. It is baffling to say the least. Disgorgement requires precise quantification of the loot. Is it SEBI’s case that the extent of payoff to keep silent or look the other side was Rs 13 crore or thereabouts? And the joint and several order raises a pertinent issue. Was the payoff to the partners or to the firm? Of course the liability of partners under the partnership law is joint and several. Sebi seems to have introduced a new twist by roping in the firm too to share the liability. In the US, Kenneth Lay was called upon to disgorge $230 million – the money made by him through ramping up of Enron share prices, by blithely using employees’ retirement benefit funds. In India, Lalu Yadav, the feisty former chief minister of Bihar, is alleged to have looted Rs 900 crore in the infamous fodder scam but no disgorgement order has been passed though he has been convicted in two of the six cases. Sebi perhaps wants to blaze a trail but it should enlighten the public first. At the more fundamental level, the Sebi must be lauded for reading the riot act to auditors who all along have insulated themselves with the Teflon quality that is conferred on the profession by the more than century-old verdict of the House of Lords in the famous Kingston Cotton Mill’s case— auditors are watchdogs not bloodhounds. Auditors of the world are exalted and it continued till Enron happened. And in India till Satyam happened. The grim message is auditors can no longer take shelter under this self-serving alibi of not being bloodhounds. Thus the Sebi order has two extreme reactions — bold and deterrent on the one extreme and overreach and overkill on the other. Purists have one more objection— how come Sebi arrogated to itself the power to debar a firm and its partners when such power has been rightly or wrongly vested in the ICAI (Institute of Chartered Accountants of India) as a self-regulatory measure? Will this deter youngsters from choosing auditing as a profession? Mounting cases against doctors has had two consequences— defensive medication leading to bloating of medical bills and youngsters shying away from the medical profession. Something similar can happen to wannabe auditors.