business article

1. Audit firms may also face action in Satyam-like cases
Joe C Mathew / New Delhi July 25, 2011, 0:31 IST
Business Standard , 25th July 2011
New Companies Bill to propose equal responsibility of auditors, firms.
Unlike in the multi-crore Satyam fraud, audit firms will not be able to
wash their hands of corporate scams perpetrated by companies in
connivance with their partner auditors.
The Companies Bill, 2011, being finalised by the Ministry of
Corporate Affairs (MCA), would seek to make audit firms and
auditors equally responsible for such wrongdoing, said a senior
official.
MCA had assured a parliamentary panel that looked into an earlier version of the Bill that it
would ensure that audit firms did not escape by putting the blame on auditors.
The need for such a clause was felt after B Ramalinga Raju, founder of the erstwhile Satyam
Computer Services, admitted to having cooked the company’s account books to show non-
existent profits. The fraud was estimated to be of the order of Rs 10,000 crore.
While Satyam’s auditors — chartered accountants who were partners of associate audit firms of
global consultancy PricewaterhouseCoopers — were arrested for alleged collusion with the
management, the audit firms were left untouched.
Under the current law, besides criminal proceedings, the Institute of Chartered Accountants of
India (ICAI) can bar the guilty auditors from doing auditing work for a specified period.
Under the ICAI Act, members found guilty of professional misconduct can be barred from
practice for up to five years or fined up to Rs 5 lakh. However, no action could be taken against
the firms, either under the ICAI Act or the Companies Act.
ICAI is conducting disciplinary proceedings against two PriceWaterhouse auditors, Srinivas
Talluri and S Gopalakrishnan, for erroneous auditing of Satyam’s books.
The Bill would propose that if the audit partner or partners were proved to have acted in a
fraudulent manner or abetted or colluded in any fraud by the company, its directors or officers,
the audit firms would be equally liable for civil or criminal proceedings.
The parliamentary panel welcomed the stringent proposals.
The Companies Bill, 2011, would also propose a maximum of 10 years imprisonment, besides a
fine of up to three times the amount involved in the fraud, for the guilty auditors.

2. SFIO allegations legally incorrect, says Sesa Goa
Jyoti Mukul / New Delhi July 25, 2011, 0:21 IST
Business Standard , 25th July 2011
Sesa Goa, one of the country’s leading iron ore exporters, has denied charges levied against the
company by the Serious Fraud Investigation Office that works under the Ministry of Corporate
Affairs.
In a written response to the ministry that runs into more than 40 pages, the company has termed
the SFIO report “legally and factually incorrect”.
Based on the allegations of a shareholder, charges have been levied against the company for
under-invoicing of iron ore exports; excess commissions paid; over-invoicing of import of
coking coal and over-invoicing of iron ore sold to the subsidiary company.
The company said SFIO’s conclusions were contradicted by its own findings that there had been
no siphoning of funds and no suspicious transactions observed on investigating the records of the
company, banks and customs over the period of 10 years. “It is indeed surprising that allegations
have been levied against the company,” the firm said in a recent response to the corporate affairs
ministry. The company has alleged that the SFIO report was based on a complaint of a
“disgruntled shareholder”, his family and friends, who have a history of speculating heavily in
the securities market.
The Vedanta group company also said that SFIO carried out investigations with “a pre-
determined mind” and the aim seemed to have been to somehow establish wrong doing by the
company. When contacted, the official spokesperson declined to comment.
The investigation had obtained copies of bank statements and related records from various bank
branches, especially from Canara Bank, State Bank of India, and HDFC Bank, the main bankers
of Sesa Goa, to scrutinise any suspicious transaction relating to the siphoning of the funds.
Quoting the SFIO report itself, the company said a sample of transactions with high value was
checked with their General Ledger accounts and nothing contrary was established.
“Copies of statement of export earnings foreign currency accounts were also seen and matched
with their related transactions in books of account and no suspicious transactions was found
during the course of investigation.”

3. The company has also contested charged of excess commission paid to Mitsui & Co in
comparison to agents in Pakistan and Turkey. It said despite the commission the price realisation
per tonne of iron ore at $11.69 was higher in China than $11.04 in Turkey in 2001-02. Similarly,
it was $30.98 for China in 2004-05 as compared to $19.82 for Pakistan and $19.84 for Turkey.
“There was a vast difference in the work performed by Mitsui & Co in China versus agents in
Pakistan and Turkey. The agents in Pakistan and Turkey were for sales to one party and
primarily involved in coordinating payments and timely opening of L/C. Mitsui opened up the
China market for Sesa Goa, dealt with multiple parties across a vast geographical area and also
underwrote credit risks,” said the company in its response.
On charges of over-invoicing of import of coking coal, the company has maintained that the
price for import of coking coal made by other companies in the country during the same period
were similar to the price paid by Sesa Goa. Tata Metaliks and Kalyani Steels, which also
imported coal from BHP Mitsui during the same years, paid the same price. “In fact, some
companies paid a higher price for coking coal (SAIL paid $105 a tonne from Xstrata and $115
from BHPB. During the same time, Sesa Goa, Tata Metaliks and Kalyani Steels got coal at $65 a
tonne).”
Even in the case of alleged under invoicing of exports of iron ore made by Sesa Goa Ltd, the
company has said the comparison made by SFIO of a long-term price contracts made with
Zhangdian, a steel mill in China, with other long-term contracts was incorrect. The contract with
Zhangdian was made during the year 2004 when the supply of iron ore was limited. Further, the
export prices of Sesa Goa to other customers were comparable with those of other exporters from
Goa during that time. Even MMTC’s price for much higher grades under contracts were far
lower than Zhangdian price of Sesa, it said.
On charges of over invoicing of iron ore sold by Sesa Goa to Sesa Industries which now stands
merged with the former, the company said the pricing of iron ore was done strictly according to
the transfer pricing policy approved by the boards of the respective companies, which was also
certified by the company’s auditors.
“The alleged loss calculated by SFIO between 2005 till 2009 does not stand to any logic as Sesa
Industries has merged with Sesa Goa effective April 1, 2005. In any event, Sesa Goa had more
than 88 per cent shareholding in Sesa Industries. Any alleged excess recovery from Sesa
Industries was, therefore, predominantly revenue neutral, particularly when Sesa Goa does not
have the benefit of any carried forward loss under income tax act.”
The SFIO report had also alleged violation of Section 68 of the Companies Act of 1956,
amounting to dishonest concealment of fact. The company has, however, contended that the
application of the charges was erroneous as there was there was no public offer or prospectus in
the preferential allotment of shares to SGL shareholders, as mentioned by SFIO itself in its
report.