Auditors of IL&FS Financial Services (IFIN) — Deloitte Haskins and BSR & Associates — on Friday argued in the National Company Law Tribunal (NCLT) that Section 140 (5) of the Companies Act under which the Ministry of Corporate Affairs (MCA) was seeking to ban them for five years applies only to auditors who are still auditing the company and not those who have resigned.
They said Section 140(5) is only a means of getting rid of the auditor who has not resigned.
But in this case, Deloitte and BSR Associates have already resigned. BSR & Associates had resigned last month. Deloitte resigned back in 2018 as its tenure as the auditor of the company had expired. Hence, the counsels argued that the tribunal cannot remove any auditor retrospectively.
Also, the counsel’s argued, if the alleged fraud that the auditors have been accused of is proved and the tribunal passes a final order, then automatically the auditors will get barred from the business of auditing. However, the SFIO investigation report based on which the MCA has asked for banning them is only an interim report and it doesn’t establish fraud. It is a mere allegation which can’t be the basis of banning any auditor.
The auditors, the counsel argued, can be tried under section 447 of the companies act 2013 which establishes the grounds under which a fraud can established and if found guilty then they can be penalised or barred for a maximum of 10 years. And, they said, the MCA can proceed with their plea under Section 447 if they are confident of proving fraud.
The matter was part heard on Friday and has been posted for further hearing on Monday. Meanwhile, the NCLT has allowed the MCA to prosecute the auditors in the matter.
The SFIO, in its complaint, had alleged that the auditors were aware that IFIN was lending to defaulting borrowers through group companies so that it could suppress its non-performing assets and not provide for the bad debt.
Moreover, the SFIO report said, that the auditors failed to verify the end-use of bank finances and money raised through non-convertible debentures (NCDs) despite it being a regulatory mandate for verifying such things. The SFIO complaint goes on to say that the auditors falsified books of accounts and financial statements of the company from FY14 to FY18 and did not report the negative net owned fund, as well as its negative capital to risk (weighted) assets ratio, resulting in loss to investors who had invested in the company’s NCDs. The audit committee members colluded with the management and overlooked the many impairment indicators in contravention of the accounting standards and principles of prudence, the SFIO said in its complaint.