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Over to you, Sebi!
August, 18th 2010

With the Bombay High Court dismissing the writ petition filed by Price Waterhouse challenging the jurisdiction of the Securities and Exchange Board (Sebi) to investigate the audit firm's role in the Rs 7,000 crore Satyam accounting fraud, the decks have been cleared for Sebi to get into hitherto uncharted waters: determining the culpability or otherwise of auditors.

Ever since the former Chairman of Satyam, Ramalinga Raju admitted the software services firm had fraudulently incorporated a non-existent cash component and inflated its bank balance, its auditors/accountants and the regulatory body the Institute of Chartered Accountants of India (ICAI) have been under the scanner.

As the regulator of capital markets, Sebi has to be concerned with the transparency and integrity of companies financial statements, which guide all investment decisions. However, to the extent Sebi has no direct oversight over accounting professionals, its locus standi in the matter was never very clear.

That uncertainty has now ended with the Bombay High Court ruling in its favour. Delivering the order, the Division Bench said, It is not a situation where we can say that Sebi cannot proceed with its investigations.

The matter is unlikely to end there. Price Waterhouse is expected to go in appeal to the Supreme Court. Nonetheless, the ruling is important as it goes beyond the specific case of Satyam. It clears the air around a potentially contentious issue: regulatory overlap between Sebi and ICAI. Price Waterhouse's contention is that audit firms are not market intermediaries regulated by Sebi. They are registered with the ICAI and are accountable to it for any professional lapses.

The problem is ICAI, like almost all other self-regulatory organisations in India, lacks teeth. It has an extremely poor track record in pulling up errant members. Following the Enron scam, the US set up the PCAOB (Public Company Accounting Oversight Board) under the Sarbanes-Oxley Act even though there is a separate body, the AICPA Institute, that sets professional standards. The time has come for us to think of replicating something on these lines.

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