1. This is perhaps THE article I was avoiding to write. Actually, I was hoping that SOMEBODY will write an article giving inputs about the case for an auditor. But somehow I could not find one. So I started reading it. While reading any piece of material to understand, I take notes in my scratch book. Thus what I am putting forth is perhaps the points I have gathered in my scratch book.
2. Any person rendering attestation service is a potential audience. An attest function, in simple language means “To affirm to be correct, true, or genuine”. It means, in addition to chartered accountants, it is relevant for
a. Cost accountants [ cost audit ],
b. Company secretaries [ secretarial audit ]
3. Being honest with one’s own conscious, if one looks into his own attestation work, he will find lacunas in his systems. It may be small; it may not culminate into any kind of material damage to anybody. But it is definite that time has come that, we take a break, introspect our systems for quality, relevance, independence etc.
4. Mr. T V S Mohandas Pai of Infosys reacted that, though the decision has taken long since the disclosure by Mr. Raju on 7 January 2009, but this decision will go a long way to deter the promoters, people from finance and auditors from trying to portray something which is not there.
5. Each person from the family of audience must read this case.
6. IT is abundantly clear that the expectations from statutory auditor have increased than ever before.
7. The Judgement of Satyam Case is a strong eye opener. The article is divided into following 2 parts.
1) To create an awareness of change in the role of auditor
2) To enable audience to read the Whole case
8. This is perhaps more important. We have been taught that an audit conducted with a view to give an opinion about the truthful and fairness of financial statements, it does not include the objective to find out frauds / errors.
9. Though the principle has remained constant, the expectations thereof have gone a sea change.
10. One glaring limitation of all audit procedures is that, we are verifying / analysing information / bunch of papers. Many a times, in respect of listed companies, risk of mis statement in case of fraud, the risk is from management itself.
11. The journey of the change in expectations / perceptions may be mapped as follows
Salient features of the companies Act, 1956
12. Sub section (3C) to Section 211 was introduced with effect from 31-10-1998 by the Companies (Amendment) Act, 1999 to make the accounting standards compulsory for all companies.
13. The Companies [Accounting Standards] Rules, 2006 have come into force in December 2006. It has been a phenomenon that, despite this, many of the financial statements especially of private limited companies were being certified with a note that the financial statements are in compliance with the accounting standards issued by ICAI.
Amendment to section 224 (e ) and (f) of the companies Act, 1956 read with GN by ICAI
14. It required the auditors to report any adverse comment / qualification in either BOLD or italics. It was done with a view to enable the reader to find adverse comment / qualification with ease.
Salient features of Old auditing standard namely Standard Auditing Practices 4 – Fraud and Errors issued on July 1, 1987 Institute of Chartered Accountants of India [ICAI]
15. The said publication speaks more about the principles and that too about conservative / protective role of auditor. It elaborates more on what an auditor can not do than what an auditor should do.
Salient features of CARO, 2004
16. I do not go into the MAOCARO, 1988 as the scope was substantially increased by CARO 2004.
17. For the first time, i.e. for the year ending 31-3-2004, it introduced specific reporting on fraud committed by or on the company. ICAI came out with a statement on CARO 2004 to clarify the duties of the auditors which in itself increased the scope and context of the duties of auditors.
Salient features of standard on auditing 240 – The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements 5 coming into effect from 1 april 2009
18. You may remember, that there was a phase when they were called Auditing and Assurance Standard [AAS]. I am re-producing relevant paragraphs. Please compare the exhaustive requirements spell out as compared to SAP – 4 above. It speaks about professional skepticism, detailed procedure to be conducted for ensuring that the financial statements are free from material fraud / error.
12. In accordance with SA 200, the auditor shall maintain an attitude of professional skepticism throughout the audit, recognizing the possibility that a material misstatement due to fraud could exist, notwithstanding the auditor’s past experience of the honesty and integrity of the entity’s management and those charged with governance. (Ref: Para. A7- A8)
Unusual or Unexpected Relationships Identified 22. The auditor shall evaluate whether unusual or unexpected relationships that have been identified in performing analytical procedures, including those related to revenue accounts, may indicate risks of material misstatement due to fraud.
23. The auditor shall consider whether other information obtained by the auditor indicates risks of material misstatement due to fraud. (Ref: Para. A22)
A2. Fraudulent financial reporting involves intentional misstatements including omissions of amounts or disclosures in financial statements to deceive financial statement users. It can be caused by the efforts of management to manage earnings in order to deceive financial statement users by influencing their perceptions as to the entity’s performance and profitability. Such earnings management may start out with small actions or inappropriate adjustment of assumptions and changes in judgments by management. Pressures and incentives may lead these actions to increase to the extent that they result in fraudulent financial reporting. Such a situation could occur when, due to pressures to meet market expectations or a desire to maximize compensation based on performance, management intentionally takes positions that lead to fraudulent financial reporting by materially misstating the financial statements. In some entities, management may be motivated to reduce earnings by a material amount to minimize tax or to inflate earnings to secure bank financing.
A4. Fraudulent financial reporting often involves management override of controls that otherwise may appear to be operating effectively. Fraud can be committed by management overriding controls using such techniques as:
Professional Skepticism (Ref: Para. 12-14)
A7. Professional skepticism is an attitude that includes a questioning mind and a critical assessment of audit evidence. Maintaining an attitude of professional skepticism requires an ongoing questioning of whether the information and audit evidence obtained suggests that a material misstatement due to fraud may exist. It includes considering the reliability of the information to be used as audit evidence and the controls over its preparation and maintenance where relevant. Due to the characteristics of fraud, the auditor’s attitude of professional skepticism is particularly important when considering the risks of material misstatement due to fraud.
A8. Although the auditor cannot be expected to disregard past experience of the honesty and integrity of the entity’s management and those charged with governance, the auditor’s attitude of professional skepticism is particularly important in considering the risks of material misstatement due to fraud because there may have been changes in circumstances.
A9. As explained in SA 200, an audit performed in accordance with SAs rarely involves the authentication of documents, nor is the auditor trained as or expected to be an expert in such authentication. However, when the auditor identifies conditions that cause the auditor to believe that a document may not be authentic or that terms in a document have been modified but not disclosed to the auditor, possible procedures to investigate further may include:
-Confirming directly with the third party.
-Using the work of an expert to assess the document’s authenticity.
Unpredictability in the Selection of Audit Procedures (Ref: Para. 29(c))
A36. Incorporating an element of unpredictability in the selection of the nature, timing and extent of audit procedures to be performed is important as individuals within the entity who are familiar with the audit procedures normally performed on engagements may be more able to conceal fraudulent financial reporting. This can be achieved by, for example:
Salient features of the companies Act, 2013
19. The new Companies Act, 2013 has a few main features i.e. transparency and autonomy given to the shareholders for deciding many of the issues without permission of Central Government.
20. For the FY 2014-15, specific reporting is required on 3 issues namely,
§ Pending litigations
§ Provision for foreseeable material losses
§ Delay in transferring amounts to investor education and protection fund.
21. The Act has incorporated National Financial Reporting Authority [Sec 132] where a body other than ICAI will be over viewing the financial statements reported and recommending action to be taken. The lacuna in the Chartered Accountants Act, 1949 i.e. the council can take action only against members in their individual capacity and not against the firm is specifically removed by this section.
22. The concept of having a body such as National Financial Reporting Authority is not new as such. The Institute of Chartered Accountants of India already has many of these powers. In the Companies (Amendment) Act, 1999, new sub-sections (3A), (3B) and (3C) were inserted in section 211, which required that the every balance sheet and profit & loss account of the Company shall comply with the accounting standards, as may be prescribed by the Central Government in consultation with the National Advisory Committee on Accounting Standards (NACAS).
23. Therefore, section 210A was enacted to constitute an Advisory Committee to be called “National Advisory Committee on Accounting Standards” to advise the Central Government on the formulation and lying down of accounting policies and accounting standards for adoption by companies or class of companies under this Act.
24. In Companies Act, 2013, the nomenclature of National Advisory Committee on Accounting Standards (NACAS) has been changed as National Financial Reporting Authority (NFRA) and unlike NACAS it will not merely be an advisory body but a regulatory authority for auditing, accounting and financial reporting. The role of the Authority has been extended to advice on matters related to Auditing Standards in addition to Accounting Standards and also to act as a regulatory body for accountancy profession.
25. Through Section 132 of the Companies Act, 2013, the Central Government has introduced a new regulatory authority named as National Authority for Financial Reporting known as National Financial Reporting Authority (NFRA) with wide powers to recommended, enforce and monitor the compliance of accounting and auditing standards. The present Companies Act, 1956 empowers the Central Government to form a Committee for recommendations on Accounting Standards which is National Advisory Committee on Accounting Standards (NACAS). This is now being renamed with enhanced powers and authority as National Financial Reporting Authority (NFRA).
26. NFRA shall be responsible for monitoring and enforcing compliance of auditing and accounting standards and for that purpose, oversee the quality of professions associated with ensuring such compliances. The Authority shall investigate professional and other misconducts which may be committed by Chartered Accountancy members and firms. There is also a provision for appellate authority.
27. The National Financial Reporting Authority shall be a quasi – judicial body to regulate matters related to accounting and auditing. With increasing demand of non – financial reporting, it may be referred to as a National level business Reporting Authority to regulate standards of all kind of reporting- financial as well as non – financial, by the companies in future.
28. The Authority will also change the way of notifying of Accounting and Auditing Standards as is evident from provisions of Clauses 133 and 143 of the Companies Act, 2013.
Objectives of NFRA
29. The objectives of National Financial Reporting Authority inter alia shall be as follows:
· Make recommendations on formulation of accounting and auditing policies and standards for adoption by companies, class of companies or their auditors;
· Monitor and enforce the compliance with accounting standards, monitor and enforce the compliance with auditing standards;
· Oversee the quality of service of professionals associated with ensuring compliance with such standards and suggest measures required for improvement in quality of service, and
· Perform such other functions as may be prescribed in relation to aforementioned objectives.
· These objectives simply bring chartered accountants, cost accountants, management accountants, company secretaries as well as independent directors/ members audit committees under jurisdiction of NFRA.
30. The Text of Sections 447, 448 and 449 alongwith 143 of the Companies Act, 2013 is re-produced hereinbelow.
Section 143(3) The auditor’s report shall also state—
(f) the observations or comments of the auditors on financial transactions or matters which have any adverse effect on the functioning of the company;
(h) any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith;
(9) Every auditor shall comply with the auditing standards.
(11) The Central Government may, in consultation with the National Financial Reporting Authority, by general or special order, direct, in respect of such class or description of companies, as may be specified in the order, that the auditor’s report shall also include a statement on such matters as may be specified therein.
(12) Notwithstanding anything contained in this section, if an auditor of a company, in the course of the performance of his duties as auditor, has reason to believe that an offence involving fraud is being or has been committed against the company by officers or employees of the company, he shall immediately report the matter to the Central Government within such time and in such manner as may be prescribed.
Punishment for fraud.
447. Without prejudice to any liability including repayment of any debt under this Act or any other law for the time being in force, any person who is found to be guilty of fraud, shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud:
Provided that where the fraud in question involves public interest, the term of imprisonment shall not be less than three years.
Explanation.—For the purposes of this section—
(i) “fraud” in relation to affairs of a company or any body corporate, includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss;
(ii) “wrongful gain” means the gain by unlawful means of property to which the person gaining is not legally entitled;
(iii) “wrongful loss” means the loss by unlawful means of property to which the person losing is legally entitled.
Punishment for false statement.
448. Save as otherwise provided in this Act, if in any return, report, certificate, financial statement, prospectus, statement or other document required by, or for, the purposes of any of the provisions of this Act or the rules made thereunder, any person makes a statement,—
(a) which is false in any material particulars, knowing it to be false; or
(b) which omits any material fact, knowing it to be material, he shall be liable under section 447.
Punishment for false evidence.
449. Save as otherwise provided in this Act, if any person intentionally gives false evidence—
(a) upon any examination on oath or solemn affirmation, authorised under this Act; or
(b) in any affidavit, deposition or solemn affirmation, in or about the winding up of any company under this Act, or otherwise in or about any matter arising under this Act, he shall be punishable with imprisonment for a term which shall not be less than three years but which may extend to seven years and with fine which may extend to ten lakh rupees.
Salient features of CARO, 2015
31. There is no much difference in CARO 2015. Rather some of the features of CARO 2004 are dropped.
Salient features of Financial Reporting Review Board of ICAI
32. Following are the extracts of the publication of FRRB on compliance with various accounting standards published in 2010. It highlights the ignorance among members regarding the amended reporting requirements. I will suggest members may go through the complete report as mentioned at http://www.icai.org/new_post.html?post_id=969&c_id=61
33. The Board also acts pro-actively to give advice to an auditor in case he is in dilemma as to how he should report a particular phenomenon.
Matter-: Matter contained in Annual Report
In the Annual Report of a Company for the Financial Year 2003-04, the accounting policy regarding inventory provides as below: “Stock of material sold by one unit to other is valued at transfer price.”
It was viewed that the stock of material sold by one unit to the other is valued at transfer price. This may result in the recognition of unrealised profits in the financial statements, which is against the concept of prudence and the generally accepted accounting principle of not recognising any unrealised gains in the financial statements.
In the Annual Report of a Company for the Financial Year 2003-04, the company had disclosed the ‘Proceeds from General Reserve’ as the cash flow from financing activities and this amount is a negative figure.
It was felt that no direct cash flow receipt/ payment takes place on account of general reserve and, therefore, there may not be any proceeds from general reserve, which required a disclosure in the cash flow statement.
Year 2004-05, it has been noted that inventories were described “as taken, as valued and certified by the management.”
certified by the management’ may lead the users of financial statements to believe that the auditor merely relies on the management’s certificate without carrying out any other appropriate audit procedures to satisfy himself about the existence and valuation of inventories. Therefore, usage of such words indicates that there is a disclaimer for inventories which should be avoided. It may be mentioned that in the clarification, it has also been suggested that the auditors may advise his client to omit the words “as valued and certified by the management”, when describing inventories in the financial statement.
Peer Review Board of ICAI
34. The ICAI also has taken a suo motto step to create and put in place, the checks and balances to verify whether the auditor is complying with auditing standards. Earlier, there was a Chinese wall in the report of peer review and action to be taken by disciplinary board. AS of today, the same stands removed.
Salient features of the way the new auditing standards are structured.
35. I am re-producing the index of relevant Standards on auditing. It will highlight change in the role of auditor.
300-499 Risk Assessment and Response to Assessed Risks
· SA 300 “Planning an Audit of Financial Statements”
· SA 315 “Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment”
· SA 320 issued “Materiality in Planning and Performing an Audit”
· SA 330 “The Auditor’s Responses to Assessed Risks”
· SA 402 issued “Audit Considerations Relating to an Entity Using a Service Organisation”
· SA 450 issued “Evaluation of Misstatements Identified During the Audit”
500-599 Audit Evidence
· SA 500 “Audit Evidence”
· SA 501 “Audit Evidence—Specific Considerations for Selected Items”
· SA 505 “External Confirmations”
· SA 510 “Initial Audit Engagements – Opening Balances”
· SA 520 “Analytical Procedures”
· SA 530 “Audit Sampling”
· SA 550 “Related Parties”
· SA 560 “Subsequent Events”
· SA 570 “Going Concern”
· SA 580 ”Written Representations”
· SA 540 “Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures”
700-799 Audit Conclusions and Reporting
· SA 700 “Forming an Opinion and Reporting on Financial Statements
· SA 705 “Modifications to the Opinion in the Independent Auditor’s Report”
· SA 706 “Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report”
· SA 710 “Comparative Information—Corresponding Figures and Comparative Financial Statements”
· SA 720 “The Auditor’s Responsibility in Relation to Other Information in Documents Containing Audited Financial Statements”
36. Everybody is aware that, on 9-April-2015, the much awaited judgement in the case of Satyam Computers Limited [Satyam / the Satyam case] was pronounced In The Court Of The XXI Addl. Chief Metropolitan Magistrate -Cum-Special Session Court, Hyderabad by Justice Shri B.V.L.N. Chakravarthi.
37. It is said that, it took 2-3 weeks just for drafting the order which runs into 971 pages.
38. The case was filed by Mrs. Leena Mangat, a share holder of Satyam, against the promoters, directors, employees, internal and external auditors. Later, the state registered a complaint and an inquiry was made by CBI.
39. We are accustomed to reading the material relating to taxation, company law, accounting, auditing etc. It is so because we are aware of framework behind the said stuff.
40. I experienced great difficulty in reading those 971 pages because we are not accustomed to reading cases of criminal proceedings.
41. The objective of this article is to enable / equip [ I would even dare to say ‘armour’ ] the audience to read / grasp the whole Satyam case. This article is in no way substitute for reading the actual Satyam Judgement.
42. This article is intended to create a mind set for the audience to read the judgement. In other terms, it is just like a preface we have to accounting standards, auditing standards which prepare our mindset to read and understand the said material giving context thereof.
43. I have focused only on the role of external auditor.
44. At the outset, let me accept that I have not read whole of the judgment word by word. Even though my eyes have screened all the words of the judgment, I am convinced that I have not mis-understood the judgment.
45. Also, the various exhibits, based on which the learned judge has come to a conclusion were not available for perusal. It would have given a greater insight into the facts of the case and the flow of events and context thereof. For example, consider following exhibits
§ Ex.P2892 Copy of audit committee presentation on 29-03-2007, containing the I.T. Deficiencies pointed out to the audit committee members.
§ Ex.P2893 Copy of audit committee presentation on 20-04-2007, wherein it was reported that there were no significant deficiencies.
46. Also in addition to the Satyam case, one may also read following cases / documents. A person may also go through the video on this subject aired on ETNOW.
a. Bombay High Court in Tri-sure India Ltd. Vs. Registrar of Companies, Maharashtra reported in (1983) 54 Comp Cas 197
b. Delhi High Court in case of Sriniwas Talluri dated 13 March 2011
c. Delhi High Court in case of S Gopalkrishnan dated 30 May 2011
d. Supreme Court in case of S Gopalkrishnan dated 21 April 2011
e. Press Release by CBI dated 9 April 2015
f. FIR filed against the company.
47. The text of above judgements and the video has made available on http://salcoca.com/ legal-rulings / [the link]. The reader is requested to see the video by giving a search in youtube.com as “Amicus Curiae – Legal Experts On Satyam Verdict & Ramalinga Raju’s Punishment”
48. I have given a detailed index of the case in the appendix. It will allow the audience to read the case in bits and pieces i.e. whenever they get time, they can directly reach the topic they want to read.
List of Accused
Accused from Satyam
§ A1 Byrraju Ramalinga Raju, Chairman
§ A2 Byrraju Rama Raju, Managing Director,
§ A3 Vadlamani Srinivas, Sr. Vice President & Chief Financial Officer
§ A7 G. Ramakrishna,The then Vice President (Finance)
§ A8 D. Venkatapathi Raju, Sr. Manager (Finance)
§ A9 Ch. Srisailam, Asst. Manager (Finance)
§ A10 V. Suryanarayana Prabhakar Gupta, Global Head, Internal Audit
Accused outside Satyam
§ A4 Subramani Gopalakrishnan, Partner M/s Price Waterhouse
§ A5 Talluri Srinivas, Partner of M/s Price Waterhouse, Hyderabad
Something we should know about other Acts-:
49. Before addressing the case, I think, it is prudent to refresh some of the sections from following acts which are used time and again in the judgement. We should have, at least, gist of it. The actual text of the sections is re-produced in the a pdf file which is available at above link.
§ the Indian Penal Code
§ the Evidence Act
§ the Code of criminal Procedures
§ the Bankers Books Evidence Act, 1891
It is necessary to say a brief word about section 65B and 114 of the Indian Evidence Act, 1872 and section 162 of the code of Criminal Procedures 1873.
1. Section 114 – Court may presume existence of certain facts.
2. Section 65B – Admissibility of electronic records
Section 65B – Admissibility of electronic records
(1) Notwithstanding anything contained in this Act, any information contained in an electronic record which is printed on a paper, stored, recorded or copied in optical or magnetic media produced by a computer (hereinafter referred to as the computer output) shall be deemed to be also a document, if the conditions mentioned in this section are satisfied in relation to the information and computer in question and shall be admissible in any proceedings, without further proof or production of the original, as evidence of any contents of the original or of any fact stated therein or which direct evidence would be admissible.
(2) The conditions referred to in sub-section (1) in respect of a computer output shall be the following, namely :-
(a) the computer output containing the information was produced by the computer during the period over which the computer was used regularly to store or process information for the purposes of any activities regularly carried on over that period by the person having lawful control over the use of the computer;
(b) during the said period, information of the kind contained in the electronic record or of the kind from which the information so contained is derived was regularly fed into the computer in the ordinary course of the said activities;
(c) throughout the materiel part of the said period, the computer was operating properly or, if not, then in respect of any period in which it was not operating properly or was out of operation during that part of the period, was not such as to affect the electronic record or the accuracy of its contents; and
(d) the information contained in the electronic record reproduces or is derived from such information fed into the computer in the ordinary course of the said activities.
(3) Where over any period, the functions of storing or processing information for the purposes of any activities of any regularly carried on over that period as mentioned in clause (a) of sub-section (2) was regularly performed by computer, whether-
(a) by a combination of computers operating over that period; or
(b) by different computers operating in succession over that period; or
(c) by different combinations of computers operating in succession over that period; or
(d) in any other manner involving the successive operation over that period, in whatever order, of one or more computers and one or more combinations of computers.
all the computers used for that purpose during that period shall be treated for the purposes of this section as constituting a single computer; and references in this section to a computer shall be construed accordingly.
(4) In any proceedings where it is desired to give a statement in evidence by virtue of this section, a certificate doing any of the following things, that is to say,-
(a) identifying the electronic record containing the statement and describing the manner in which it was produced;
(b) giving such particulars of any device involved in the production of that electronic record as may be appropriate for the purpose of showing that the electronic record was produced by a computer;
(c) dealing with any of the matters to which the conditions mentioned in sub-section (2) relate, and purporting to be signed by a person occupying a responsible official position in relation to the operation of the relevant device or the management of the relevant activities (whichever is appropriate) shall be evidence of any matter stated in the certificate; and for the purpose of this sub-section it shall be sufficient for a matter to be stated to the best of the knowledge and belief of the person stating it.
(5) For the purposes of this section,-
(a) information shall be taken to be supplied to a computer if it is supplied thereto in any appropriate form and whether it is so supplied directly or (with or without human intervention) by means of any appropriate equipment;
(b) whether in the course of activities carried on by any official, information is supplied with a view to its being stored or processed for the purposes of those activities by a computer operated otherwise than in the course of those activities, that information, if duly supplied to that computer, shall be taken to be supplied to it in the course of those activities;
(c) a computer output shall be taken to have been produced by a computer whether it was produced by it directly or (with or without human intervention) by means of any appropriate equipment.
Explanation.- For the purposes of this section any reference to information being derived from other information shall be a reference to its being derived there from by calculation, comparison or any other process.]
Section 114 of the Indian Evidence Act, 1872
Court may presume existence of certain facts.
114. Court may presume existence of certain facts. The Court may presume the existence of any fact which it thinks likely to have happened, regard being had to the common course of natural events, human conduct and public and private business, in their relation to the facts of the particular case.
The Court may presume–
(a) that a man who is in possession of stolen goods soon after the theft is either the thief or has received the goods knowing them to be stolen, unless he can account for his possession;
(b) that an accomplice is unworthy of credit, unless he is corroborated in material particulars;
(c) that a bill of exchange, accepted or endorsed, was accepted or endorsed for good consideration;
(d) that a thing or state of things which has been shown to be in existence within a period shorter than that within which such things or states of things usually cease to exist, is still in existence;
(e) that judicial and official acts have been regularly performed;
(f) that the common course of business has been followed in particular cases;
(g) that evidence which could be and is not produced would,
if produced, be unfavourable to the person who withholds it;
(h) that if a man refuses to answer a question which he is not compelled to answer by law, the answer, if given, would be unfavourable to him;
(i) that when a document creating an obligation is in the hands of the obligor, the obligation has been discharged.
But the Court shall also have regard to such facts as the following, in considering whether such maxims do or do not apply to the particular case before it:–
as to illustration (a)–a shop-keeper has in his till a marked rupee soon after it was stolen, and cannot account for its possession specifically, but is continually receiving rupees in the course of his business:
as to illustration (b)–A, a person of the highest character is tried for causing a man’s death by an act of negligence in arranging certain machinery. B, a person of equally good character, who also took part in the arrangement, describes precisely what was done, and admits and explains the common carelessness of A and himself:
as to illustration (b)–a crime is committed by several persons.
A, B and C, three of the criminals, are captured on the spot and kept apart from each other. Each gives an account of the crime implicating D, and the accounts corroborate each other in such a manner as to render previous concert highly improbable:
as to illustration (c)–A, the drawer of a bill of exchange, was a man of business. B, the acceptor, was a young and ignorant person, completely under A’s influence:
as to illustration (d)–it is proved that a river ran in a certain course five years ago, but it is known that there have been floods since that time which might change its course:
as to illustration (e)–a judicial act, the regularity of which is in question, was performed under exceptional circumstances:
as to illustration (f)–the question is, whether a letter was received. It is shown to have been posted, but the usual course of the post was interrupted by disturbances:
as to illustration (g)–a man refuses to produce a document which would bear on a contract of small importance on which he is sued, but which might also injure the feelings and reputation of his family:
as to illustration (h)–a man refuses to answer a question which he is not compelled by law to answer, but the answer to it might cause loss to him in matters unconnected with the matter in relation to which it is asked:
as to illustration (i)–a bond is in possession of the obligor, but the circumstances of the case are such that he may have stolen it.
This section allows Court to take a judgmental call based on its experience and matter before it. It is so because, absolute evidence or evidence like mathematics is not available. It has to be construed on the basis of what a normal person would have concluded in simillar situation.
Section 162 of the Code of Criminal Procedure, 1973
162. Statements to police not to be signed: Use of statements in evidence
(1) No statement made by any person to a police officer in the course of an investigation under this Chapter, shall, if reduced to writing, be signed by the person making it; nor shall any such statement or any record thereof, whether in a police diary or otherwise, or any part of such statement or record, be used for any purpose, save as hereinafter provided, at any inquiry or trial in respect of any offence under investigation at the time when such statement was made:
Provided that when any witness is called for the prosecution in such inquiry or trial whose statement has been reduced into writing as aforesaid, any part of his statement, if duly proved, may be used by the accused, and with the permission of the Court, by the prosecution, to contradict such witness in the manner provided by section 145 of the Indian Evidence Act, 1872 (1 of 1872); and when any part of such statement is so used, any part thereof may also be used in the re-examination of such witness, but for the purpose only of explaining any matter referred to in his cross-examination
(2) Nothing in this section shall be deemed to apply to any statement falling within the provisions of clause (1) of section 32 of the Indian Evidence Act, 1872 (1 of 1872), or to affect the provisions of section 27 of that Act
Explanation—An omission to state a fact or circumstance in the statement referred to in subsection (1) may amount to contradiction if the same appears to be significant and otherwise relevant having regard to the context in which such omission occurs and whether any omission amounts to a contradiction in the particular context shall be a question of fact
(i) It is only that part of the statement if duly proved which may be used by the accused and with the permission of the Court by the prosecution to contradict the witness concerned in the manner provided by section 145 of the Indian Evidence Act; Mohd Jainal Abedin v State of Assam, (1997) 2 Crimes 660 (Gau)
(ii) Statement of witness before investigating officer cannot be used as evidence; Ramprasad v State of Maharashtra, 1999 AIR (SC) 1969: 1999 (5) SCC 30: 1999 (3) Scale 633: 1999 (4) JT 74
What was the charge against the accused
Points for determination :
Onus is on Prosecution to prove beyond reasonable doubts
a) Whether the accused A1 to A10 during the period between the years 1999-2009 and prior to 09-01-2009 at Hyderabad, Secunderabad and other places to gain wrongfully by inflating the price of the shares of M/s. SCSL agreed to do or caused to be done illegal acts or legal acts by illegal means punishable under sections 409, 406, 419, 420, 467, 468, 471, 477-A, of Indian Penal Code, such as creating false/fake invoices to inflate sales, to show non existent cash, bank balances, accrued interest, fixed deposits, under state the liabilities of M/s. SCSL, paying dividends on non existent profits, publishing false and inflated balance sheets and financial statements, forged documents showing false rosy picture about the company to deceive investors to purchase shares of M/s. SCSL, to offload the shares of the accused at opportune times to gain wrongfully crores of rupees and caused wrongful loss to the investors to a tune of around fourteen thousand crores of rupees in pursuance of agreement under the criminal conspiracy?,
b) Whether the prosecution proved the guilt of the accused A1 to A10 for the offence punishable under section 120-B of Indian Penal Code beyond all reasonable doubt?
Something about internal control systems of Satyam and Pricewaterhouse-:
50. Before we address main issue, it is prudent to understand, the internal control system in Satyam and the Pricewaterhouse as well.
51. Just like in any big company, Satyam had multiple systems for various modules like Accounts payable, Accounts receivable, Invoice Management System, Oracle Financial etc. The systems were not integrated electronically and manual interventions were part of the design itself.
52. Just having a manual intervention is not a problem by itself.
53. On the other side, in case of Pricewaterhouse as well, there was a hierarchy of employees comprising of almost all chartered accountants conducting the audit and a specialised team for conducting the IT audit.
54. It included rotation of staff. There was even rotation of partners i.e. from S Gopalkrishnan to Sriniwas Talluri.
55. The depositions of the staff of Satyam and that of Pricewaterhouse alongwith material found on their computer, emails, physical documents etc. have been crucial for the judge to reach the judgement.
56. Deposition, in simple terms, means“Oral evidence offered by a competent witness under oath that is reduced to writing for later use in court or for discovery purposes.
57. [It included oath, deposition and cross examination of a young fellow, an articled student who was in the audit team of Satyam representing Pricewaterhouse. Imagine you join Articleship at the age of 18 and by the time you become CA at the age of 21, you face a cross examination and / or interrogation by high profile lawyers / CBI officials !!!.]
What happened at Satyam
58. As you are aware, the sales, receipts etc were overstated and loans taken were not shown in books of account. Following are the procedures identified and proved by prosecution being part of the whole scam.
§ Validation of employees shown as associated with employees
§ validation of employees shown as associated with invoices
§ validation of 7561 fake invoices
§ validation of project ids to above fake invoices
§ validation of invoices – verified by finance in – charge
§ validation of receipts of above invoices
§ validation that customers were fake and were checked by business relationship manager of SCSL
§ validation by GEQD report and sales manager
§ published sales are not equal to sales visible in business finance module
§ creation of 7 fake customers
§ fake customer – 1 – e care inc
§ fake customer – 2 – Northsea Inc
§ fake customer – 3 &4 – mobitel inc and cellnet inc
§ fake customer – 4 – hargreaves inc
§ fake customer – 5 & 6- autotech services inc and synony inc
§ invoices raised on these customer
§ fake remittances by above customers
§ creation of domain name of 7 customers
§ impersonated emails send
§ 2 sets of MIS
§ more ASOP [ESOP] to people doing falsification
§ participation in investor call
§ relating to bank balances
§ information collected from computers of certain employees
§ data from oracle finance
§ FD and Bank statement
§ loan taken with consent of BOD
§ MAYTAS infra and MAYTAS properties – deal cancelled
§ statement of Raju on 7 Jan 2009
Main Material for Audience-:
59. It starts from page 564 and paragraph 2042.
60. The question was as to which firm is the external auditor?
61. If the financials have been signed in the name of some other firm appointed as auditor, does that amount to impersonation?
62. The learned Judge has held in para 2103 and 2104 that the prosecution proved the charge for the offence punishable under section 419 of Indian Penal Code against the accused A4 and A5 beyond all reasonable doubt.
63. The financial statements were signed in the name of M/s Pricewaterhouse. M/s Pricewaterhouse, Bangalore is a separate entity than M/s Pricewaterhouse.
64. The signing partners were not partners in the firm M/s Pricewaterhouse but they were partners in M/s Pricewaterhouse, Bangalore.
65. If this has to be true, whether the partners themselves pretended to be partners of M/s Pricewaterhouse.
66. The deposition and cross examination of Mr. T. Karithikeyan (PW179), joint secretary, ICAI was relevant. It has been re-produced in para 2071.
67. The next question is role of external auditor in suppression or falsification of accounts and signing reports knowing fully well that they do not contain correct information?
68. The learned Judge has vide para 2363 held that;
2363. The above contention of the accused is not tenable in view of the fact that the facts and circumstances of the case beyond all reasonable doubt established that the accused A4 and A5 subscribed their signatures knowing fully well about the fraud in the company and therefore, they cannot absolve of their failure in discharge of their duties and the certification of false financial statements shows that the accused had fraudulent or dishonest intention at the time of subscribing signatures representing that the statements disclose true and fair affairs of the company and the circumstances clinchingly shows their culpable intention and their act deceived several investors and caused irreparable damage to the integrity of the market and to the reputation of M/s. SCSL and the acts of the auditors shows that they committed breach of the trust placed upon them by the share-holders of the company and therefore in my considered opinion they being servants deceived their master i.e share-holders of the company and therefore, the essential ingredients of the offence of section 406 and 420 of the Indian Penal Code are established against the accused A4 and A5 beyond all reasonable doubt.
69. It contained a discussion on
§ Auditing standards, guidance notes issued by ICAI.
§ A commentary on actual practices followed by Pricewaterhouse.
§ What is the role of an auditor – not expected to find all frauds etc. – whether guilty on this account
§ Procedure adopted for verification of cash and bank balances
§ Whether they adopted different standards for Satyam and different for any other company
70. There are other 2 important issues in the area of;
§ Invoice Management System (IMS)
§ System Process and Assurance (SPA)
71. The sum and substance are as follows
§ Invoice Management System (IMS)
72. There was a difference in the figure of sales as shown by IMS and as shown in the P&L.
73. The auditors had no access to the IMS and this fact was not brought to the notice of audit committee.
§ System Process and Assurance (SPA)
74. The SPA team of Pricewaterhouse was aware of the deficiencies in the system and was aware of the fact that they were not reliable.
75. Despite knowing the deficiencies, the same were not brought to the notice of Audit Committee of the company.
76. I have re-produced relevant paragraphs of the judgement in this area hereinbelow.
Invoice Management System (IMS)
2231. Mr. P.S. Sudhakar (PW193) deposed that the purpose of verification of sales is to ensure the accuracy of the sales booked in the accounts and the sample for the sales was selected from the sales register provided in Excel sheet received through e-mail from the AR team of M/s. SCSL and sales register was provided by the accused A9 and the hard copies were also provided by him and he further deposed that for the substantive audit, they have requested for the access of IMS of M/s. SCSL but the accused A9 informed them that IMS is a live database and access cannot be provided and same was discussed with the accused A4 and A5 about providing hard copies only and not giving access to IMS but they have been instructed to carry out the audit of sales based on the hard copies provided by the company representatives. Therefore his evidence on all material aspects corroborated the evidence of Mr. Ch. Ravindranath (PW192) regarding the sales audit and further denial of access to IMS when they want to do substantive audit and intimation of the same to the accused A4 and A5 and their instructions to rely on the hard copies provided by the accused A9.
2233. Here it is pertinent to note down that Mr. Chaitanya Madala (PW69) never deposed that the sales register provided to the statutory auditors was generated from the IMS only. Infact it is evidence of the team members that it was provided by the accused A9 stating that it was downloaded from IMS and at the same time it is also to be remembered that he informed the audit members that access to IMS cannot be given since it is a live database and further as per the evidence of the team members of audit the hard copies relating to sales was also provided by the accused A9.
2234. It is to be remembered that as per the evidence of Mr. N. Ramu (PW172) SPA team has pointed out control deficiencies and under those circumstances, it is the duty of the auditors to bring it to the notice of audit committee that the access to IMS was not provided to the auditors as a part of substantive sales audit. The accused A4 and A5 not coming out with any explanation why the said fact was not reported to the audit committee and on the other hand reported that there are no major issues. The accused A5 in his arguments made attempt to say that the percentage of “S” type invoices said to be verified during audit is very minimal and looking at that analysis it cannot be contended that the proportion of numbers in itself is so alarming that it should have raised a concern to the statutory auditors.
2235. The said argument of the accused is far fetched and hyper-technical in the light of the deficiencies pointed out by the SPA team as already discussed above. In the said circumstances not reporting the matter to the audit committee by the auditors shows that they intentionally and purposefully suppressed the fact from the audit committee leading to a conclusion that they have suppressed it by colluding with the other accused in furtherance of the conspiracy. Further the evidence of Mr. S. Nataraja (PW175) that in the case of audit of M/s. Infotech Enterprises Limited, in respect of invoices, their company has a procedure of making the invoices online and the auditors used to pick invoices at random for the purpose of satisfying themselves whether the revenue declared by the company is correct. The said evidence shows that in the audit of M/s. SCSL in spite of access to IMS was not provided as a part of sales substantive audit, the accused A4 and A5 did not report the matter to the audit committee strengthens my opinion that the accused A4 and A5 suppressed the said fact knowing fully well about the inflation of sales in M/s. SCSL and it is nothing but abetting the fraud in M/s. SCSL.
System Process and Assurance (SPA) Team
2265. He further deposed that “For the year 2006-2007 the SPA team was involved from review of automated controls and I.T., general controls from SOX Act perspective. The manual controls were tested by the audit team. As a result of our review, the SPA team has identified a large number of deficiencies in I.T., general controls and automated controls implemented in the I.T. Systems of M/s SCSL. These deficiencies have been communicated by the SPA team to the SPA team head Mr. Sameer Kapoor, and Mr. S. Gopala Krishnan (A4) at various points of time. The deficiencies have been reviewed by Mr. Sameer Kapoor and he has also communicated his findings to Mr. S. Gopala Krishnan (A4).”
2266. He further deposed that “Apart from the above communications, the deficiencies have been documented in the audit databases of the audit firm namely Price Waterhouse. We have documented in two audit databases namely IGAAP audit database and integrated audit database. All the deficiencies that have been identified have been aggregated into twelve significant deficiencies. The eight significant deficiencies have been documented as one critical matter in the audit databases. The deficiencies pertaining to I.T., general controls have been aggregated into four critical matters for each of the areas namely Program Development, Program changes, Computer operations and Access to program and data. The eight significant deficiencies shown in one of the critical matters containing the following deficiencies.”
“1. Audit trails have not been implemented in some of the financially significant applications.
2. User access management was not implemented in some of the financially significant applications.
3. Absence of emergency change processes.
4. Terminated employees having access to I.T. Systems.
5. Absence of documentation.
6. Usage of utilities like TOAD and SQL navigator for accessing databases.
7. Developers having access to production environment.
8. Developers migrating software into production environments.”
2294. As per his evidence the deficiencies identified in 2006-07 have been presented to the audit committee of M/s. SCSL on 29-03-2007 and he was present at that time and in the said presentation they have mentioned a good number of deficiencies and informed the audit committee that they are yet to conclude whether these deficiencies are control deficiencies (CD) or significant deficiencies (SD) or material weaknesses (MW) and they informed the audit committee that they will communicate the final findings after completion of the audit.
2295. On the audit committee meeting dated 20-04-2007 he deposed that he was not present and he was informed that the said audit committee presentation, audit committee was informed that there were no significant deficiencies and as per his evidence the accused A4 and Mr. Ch. Ravindranath (PW192) attended to the said audit committee meeting and he categorically stated that the critical matters reported by them in the audit databases state that the deficiencies are classified as significant deficiencies and as such the representation to the audit committee on 20-04-2007 was not inconformity with what was stated in the audit databases.
2296. When coming to the evidence of Mr. Ch. Ravindranath (PW192), he deposed that the system audit was conducted by SPA team headed by Mr. N. Ramu (PW172) and the said team identified various control deficiencies and same were communicated to the audit committee in the meeting held on 29-03-2007 and in the said meeting audit committee was informed that they are continuing to evaluate whether any of the said control deficiencies individually are in aggregation results in one or more significant deficiencies and same will be communicated in the next audit committee meeting and later on completion of the work himself, Mr. N. Ramu (PW172) and the accused A4 have identified eight deficiencies as significant in addition to various control deficiencies identified by SPA team in the domains of computer security, program changes, program development and computer operations as significant.
77. It will be fruitful to read the Exhibits tagged by the Court.
§ Ex.P2874 Statement of significant deficiencies that have been given in one of the critical matters for the year 2006-2007.
§ Ex.P2875 Management letter submitted to Director and Senior Vice President of M/s Satyam for the FY 2006-2007.
§ Ex.P2876 Management letter submitted to Director and Senior Vice President of M/s Satyam for the FY 2007-2008.
§ Ex.P2877 Summary of aggregated deficiencies – interim prepared as per the provisions of SOX audit for the FY 2006-2007 and contains the remediation plan prepared by M/s Satyam Computer Services Ltd.
§ Ex.P2878 Summary of aggregated deficiencies prepared as per the provisions of SOX audit for the FY 2007-2008 and contains the remediation plan prepared by M/s Satyam
§ Ex.P2879 Summary of aggregated deficiencies – final prepared as per the provisions of SOX
§ audit for the FY 2007-2008 and contains the remediation plan prepared by M/s Satyam
§ Ex.P2880 Audit impact table for the year 2006-2007 and contains the deficiencies identified in five critical matters and its potential impact on the audit and also contains the additional work that the audit team has undertaken.
§ Ex.P2881 Audit impact table for the year 2007-2008 and contains the deficiencies identified in five critical matters and its potential impact on the audit and also contains the additional work that the audit team has planned to undertake.
§ Ex.P2882 Print out of e-mail from Mr. Krishna Rao Vaddadi (PW.49) to Mr. Mahesh K with a copy to Mr. N.Ramu (PW.172) communicating their remediation plans for the deficiencies identified for the year 2007-2008.
§ Ex.P2883 Print outs of critical matter from the IGAAP audit database containing eight significant deficiencies reviewed by Mr. N.Ramu (PW.172) and cleared by Mr. S.GopalaKrishnan (A4) and also contains the print outs of critical matters for Program Development, Program changes, Computer operations and Access to data in program from the IGAAP audit database, along with certificate.
§ Ex.P2884 Print outs of e-mails forwarded to Mr. N.Ramu (PW.172) by Mr. Sameer Kapoor and Mr. S.Gopala Krishnan (A4) pertaining to communication of observations of Mr. Sameer Kapoor after the review of the deficiencies identified by the SPA team, along with certificate.
§ Ex.P2885 Print outs of step from IGAAP audit database containing conclusions that there is no comfort to support planned reliance on automated or I.T. Dependent controls for the year 2006-2007 and contains the audit impact table and deficiencies with M/s Satyam, Management responses, along with certificate.
§ Ex.P2886 Print outs of step from the integrated audit database for the financial year 2007-2008 containing the summary of aggregated deficiencies, along with certificate.
§ Ex.P2887 Print outs of step from the IGAAP audit database containing the audit impact table and summary aggregated deficiencies, for the year 2007-2008, along with certificate.
§ Ex.P2888 Print outs of e-mails from Mr. N.Ramu (PW.172) to Mr. Ch. Ravindernath with a copy to Mr. Srinivas Talluri, along with certificate.
§ Ex.P2889 Print outs of e-mail from Mr. N.Ramu (PW.172) to Mr. Srinivas Talluri on summary of aggregated deficiencies for the year 2007-2008, along with certificate.
§ Ex.P2890 Print outs of a Statement from audit methodology of Price Waterhouse Coopers on impact of I.T. Deficiencies on audit, along with certificate.
§ Ex.P2891 Print outs of step from IGAAP audit database, for the year 2005-2006 containing observations on deficiencies, along with certificate.
§ Ex.P2892 Copy of audit committee presentation on 29-03-2007, containing the I.T. Deficiencies pointed out to the audit committee members.
§ Ex.P2893 Copy of audit committee presentation on 20-04-2007, wherein it was reported that there were no significant deficiencies.
78. I am thankful to the readers for being patient in reading this lengthy article. With these words, I stop here.
( Author CA. Yogesh S. Limaye can be reached at email@example.com)
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