1. What Is A Manual Override?

Any change made by a human to a system-generated report outside normal workflow:

• NAV override in Mutual Fund - fund accountant manually changes price of illiquid bond in NAV report
• Risk report override - Risk manager changes VaR model output from 5% to 2% manually
• Financial statements - Controller posts manual journal entry to reduce bonus accrual and meet EPS
• Custodian report - Manual release of securities without system approval
• Compliance report - Manual marking of a defaulted client as compliant

SEBI / SEC Rule: Every override must have 4 documents:

1. Why: Business justification memo
2. Who: Maker-checker with independent approval, not same person
3. When: Timestamp and contemporaneous support, not back-dated email
4. Impact: Quantified impact on NAV / P&L / Risk

If any one is missing, it is "unsupported manual adjustment"

2. Legal Framework

India:

• SEBI (Mutual Funds) Reg 18(4)(f): Trustee to ensure AMC has prepared compliance manual and desired internal control mechanism including internal audit systems. Manual override without documentation = failure of control mechanism
• SEBI (Custodian) Reg 14: Every custodian shall have adequate internal controls to prevent manipulation of records including audits for securities and rights. Prohibits assignment without documentation
• SEBI LODR & Companies Act Sec 134(5)(e): Directors responsible for IFC - Internal Financial Controls
• SEBI Circular on Risk Management for MFs: All manual overrides in risk reports must be logged and reported to Risk Management Committee

US - Applied by SEBI as global best practice:

• Exchange Act Sec 13(b)(2)(A) and (B): Issuers must maintain books and records that accurately reflect transactions and maintain sufficient system of internal accounting controls
• SOX 404: Management assessment of ICFR must include controls over manual journal entries

3. Why Regulators Treat It As Serious?

1. It is the classic route for earnings management - meet analyst estimate by 1 cent
2. It hides fraud - If overrides are undocumented, you cannot reconstruct NAV / P&L
3. Violates maker-checker - Oral directive or email from CFO to junior is not control

4. Leading Case Laws

CASE 1: SEC vs Interface, Inc. (2020) - The Landmark on Manual Overrides

Facts: Georgia-based carpet manufacturer. From Q2 2015 to Q2 2016, 5 consecutive quarters, corporate controller Greg Bauer and CFO Patrick Lynch directed subordinates to book unsupported manual accounting adjustments to management bonus accruals, consultant expenses, stock-based compensation when internal forecasts showed they would miss consensus EPS.

Control Failure Found by SEC:

"Interface did not require, for example, corporate level accounting entries to have supporting documentation, and corporate finance staff regularly recorded manual adjustments with nothing more than an email or oral directive."

Entries did not comply with GAAP, artificially inflated income and EPS to meet or beat consensus estimates.

Employees then impeded investigation by producing documents falsely suggesting journal entries had contemporaneous support.

Order:

• Interface - $5 Million civil penalty for negligence-based securities fraud + reporting + ICFR violations
• CAO Bauer - $45,000 + 3 year bar from appearing before SEC
• CFO Lynch - $70,000 + 1 year bar

Principle: Manual entry without contemporaneous support = ICFR failure + Fraud, even if no restatement needed.

CASE 2: SEC EPS Initiative - Fulton Financial Corp (2020) - Parallel Case

Similar pattern - Bank made unsupported manual adjustments to meet EPS. Fined $1.5 Million. SEC used data analytics to catch small adjustments of $0.01 EPS.

Lesson: Regulators now use analytics to detect pattern of overrides near quarter-end.

CASE 3: SEC vs Magnum Hunter Resources (2016) - ICFR Broken Windows

SEC sanctioned MHR, its officers and audit engagement partner for improper assessment of ICFR and failure to maintain controls. Company had material weakness: Lack of controls over manual overrides in reserve reports.

Held: Even if financials are correct, failure to have documented control over manual overrides is independent violation under Sec 13(b)(2)(B).

CASE 4: SEBI vs Shriram Mutual Fund - Supreme Court 2006 (2006 5 SCC 361)

Not direct manual override, but foundation for strict liability in MF compliance.

Supreme Court held: Under SEBI MF Regulations, mens rea is not required. If compliance manual says NAV calculation must follow procedure, any deviation even without intent is violation.

SAT and SEBI cite this for NAV manual overrides: If fund accountant manually overrides price of security in NAV and does not document as per compliance manual, AMC is liable on strict liability basis.

CASE 5: Orbis Financial Corporation Ltd - SEBI Settlement 2024 - Indian Custodian Case

SEBI alleged Orbis violated custodian norms as it didn't have proper software for physical securities, leading to unauthorised person accessing vaults, lack of infrastructure, not appointing competent person.

Root cause: Manual override of custody records without system log. Settlement: Rs. 1.6 Crore.

SEBI then inserted Reg 19B in 2025 to mandate governance structure, risk management, scalable infrastructure, technical capacity - specifically to prevent undocumented manual overrides.

CASE 6: SEBI Circular on NAV Manipulation - 2010

SEBI directed MF houses to take action against distributors circumventing debt NAV norms by splitting purchases. Asked fund houses to get systems reviewed by independent auditor for any manual NAV override since 26.11.2010.

Principle: Any manual override in NAV report must be audited.

5. What Does Compliant Override Log Look Like?

SEBI inspection will ask for this table for every override in last 2 years: