By 07 January, 2009

Price Waterhouse has been the statutory auditor for Satyam Computer Sevices for last six years now. The apex chartered accountants’ body ICAI will seek an immediate explanation from Satyam Computer’s auditors, Price Waterhouse, on the financial fraud unearthed by the software company’s chairman B Ramalinga Raju.

Two leading corporate lawyers give their views on the auditor's role and the legal action that could be taken. 

Shantanu Surpure: The auditors may face liability.  They are appointed by the shareholders in an annual general meeting Section 227 of the Act enumerates the duties of the auditors of the company who is required to ensure that the balance sheet and profit and loss account are in agreement with the books of accounts and whether they are in compliance with specified accounting standards, etc.  

Section 233 establishes a penalty on the company for non compliance that may extend to INR 10,000.  Possible action may be taken against Price Waterhouse under the Institute of Chartered Accountants of India internal code of conduct, in addition to possible action against them under the Act.

Under Sections 62 and 63 of the Act, any person issuing a prospectus that contains a false statement may be punished with up to 2 years imprisonment and fine up to INR 50,000.   This includes directors, promoters and experts such auditors and investment bankers.

Satyam also had an ADS listing in the US and filed a prospectus with the US SEC.  Under Rule 10b-5 issued under Section 10 of the Securities Act of 1933, it is unlawful for any person to make any untrue statement of a material fact or to omit to state a material fact in connection with the sale of a security.   Under Section 11 of the Securities Act, the persons who signed the registration statement (directors and officers) are liable in addition to the underwriters, auditors and other experts.

Anonymous: Under S. 227 read with S. 233 of the Companies Act, the auditors are required to accurately, fairly and diligently review and audit the accounts of the company before issuing the signed auditors’ report. Failure to do so would result in a penalty under S.233 of Rs. 10,000.

Further, shareholder lawsuits could be brought against the audit firm for failure to exercise due care. In addition, disciplinary proceedings/enquiries could be initiated by the Institute of Chartered Accountants of India against the audit firm, which would be a very serious implication for the audit firm, as it could have the immediate effect of disqualifying their eligibility to act as statutory auditors for several banks and other institutions. Such an event could also result in suspension or debarment of the audit firm if the ICAI concludes that there were serious lapses on the audit firm’s part.

Shantanu Surpure is the Managing Attorney, Sand Hill Counsel, a Mumbai and Silicon Valley-based law firm.

The other lawyer has requested to be anonymous.  

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