Sebi plans crackdown on companies that cook their books

The Securities and Exchange Board of India (Sebi) is set to crack down on companies whose financial statements have either been falsified or incorrect business records approved by auditors.

“Sebi has come across instances where it has noticed that the financial statements are incorrect of some of the companies. We will identify these companies and direct a detailed forensic audit of the books of accounts,” said a regulatory official familiar with the development. The regulator will also pull up auditors who have signed these financial statements without disclosing the discrepancies they have noticed during the audits. “Forensic auditing of books is fine, but that is a reactionary m easure by the regulator. The frontline checks are by the boards, independent directors, and the auditors. If the auditors aren’t responsible, the regulator cannot be doing their job,” said Shriram Subramanian, founder and MD of InGovern Research Services, a proxy advisory firm. “Also, Sebi should order huge disgorgements and make some of these deviations high-profile cases to deter other fraudsters.”

Auditors are mandated under law to report to the government and report any fraud they come across while auditing the books of accounts of companies.

The recent allegations of fund diversions at hospital operator Fortis Healthcare is being examined by the regulator. Sebi has received the reference on Religare, which is also being looked into. Fortis Healthcare has come under the regulatory glare after nearly Rs 500 crore was transferred by its subsidiary Fortis Hospitals to third parties.

The company later re-classified them as promoter entities. Rules mandate related-party transactions to be approved by shareholders and the board. “In the Fortis case, the issue seems to be that of blatant fraud. SEBI has the powers of search and seizure, and should bring the promoters to book on the basis of Section 447 of the Companies Act and other LODR (listing obligations and disclosure requirements) guidelines. The auditor has a responsibility to the shareholders and should have reported to the regulator the reason for not signing off on the Q2 statements. The regulator should also look into this inaction by the auditor, Deloitte. Much like the Satyam case, the cash and cash-equivalents on the books of the company seem to be non-existent. The company’s subsidiary has conveniently given the loans to related parties without seeking shareholder approval and regulatory filings,” Subramanian of InGovern said.

Link: Economic Times- February 14, 2018