Deloitte, KPMG seek stay on NCLT order to prosecute them for IFIN auditing

Former IL&FS Financial Services (IFIN) auditors Deloitte Haskins & Sells and BSR & Associates moved the National Company Law Tribunal seeking a stay on its order allowing the Ministry of Corporate Affairs (MCA) to prosecute them, based on the findings of the Serious Fraud Investigation Office (SFIO).

The auditors also expressed their intention to move the National Company Law Appellate Tribunal (NCLAT) against the NCLT, Mumbai, order but they require a stay from the tribunal or else the government can initiate proceedings to freeze their assets.

The NCLT via its order in January 2019 had frozen assets of former Infrastructure Leasing & Financial Services (IL&FS) and allowed them to withdraw a small sum of money every month after it allowed the MCA to prosecute them and make them respondents in the main petition pertaining to IL&FS.

Apart from the two audit firms, other individuals allowed by the tribunal to be prosecuted include Deloitte partners Udayan Sen and Kalpesh Mehta, and KPMG-affiliate BSR Associates partner Sampath Ganesh. Two independent directors, who were on the IFIN board’s audit committee are also on the list.

Meanwhile, the NCLT has reserved its order in the matter between the auditors of IFIN and the government, wherein the MCA sought to ban them for five years for colluding with management and not raising red flags with authorities concerned, despite knowing the sorry state of the company’s affairs.

The auditors’ lawyers argued that the section under which the government was seeking a ban – Section 140(5) – applies only to auditors who are currently responsible for auditing the company and not those who have resigned or whose term expired. BSR & Associates resigned last month, while Deloitte’s term ended in 2018.

Moreover, the lawyers argued that the section only empowers NCLT to change the auditor if the tribunal is satisfied that the auditors were involved in a fraud. They said the tribunal could ban then only when a final order were to be passed in the case and for that to happen, fraud on the part of the auditors have to be proved first.

The lawyers also argued that the SFIO investigation report is an interim one and said the special court has not taken cognizance of the report so far.

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.

The probe report said 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 those who had invested in the company’s NCDs.

The NCLT will hear the matter on July 23.