IL&FS Auditors Escape Legal Scrutiny In Spite of Alleged Accounting Lapses

On June 16, the Supreme Court ruled in favour of the former auditors of Infrastructure Leasing and Financial Services (IL&FS) denouncing the central government’s plans to ban the auditors for a period of five years and to initiate criminal proceedings against them. The apex court’s order is in spite of the government’s probe and the forensic audit reports of IL&FS group companies which pointed out lapses by the auditors of IL&FS before it collapsed in September 2018.

While hearing the Ministry of Corporate Affairs (MCA) plea challenging an April 21 order by Bombay High Court that quashed all prosecution against BSR & Associates LLC, and Deloitte Haskins and Sells, both former auditors of IL&FS Financial Services (IFIN) before the Mumbai bench of National Company Law Tribunal (NCLT), the apex court on Tuesday upheld the high court order.

The Supreme Court’s order puts an end to the central government’s plans to penalise the auditors for their alleged lapses in accounting the books of IL&FS. A cursory look at the government’s probe into IL&FS scam, the independent forensic audit reports, the legal battle against the auditors and the government appointed board’s resolution can help understand what can be termed as the biggest financial fraud of the last decade.

In mid-2018, the group of companies of IL&FS began defaulting on its loan obligations soon after their key managerial persons began quitting their jobs. As the murkier affairs inside the Group began emerging, in October that year, the central government had appointed a new board headed by Uday Kotak which was later given the task of resolution of IL&FS entities instead of going through the Insolvency and Bankruptcy Code (IBC) route.

Also read: MCA’s Charade of Attempting to Ban Deloitte and BSR Stands Exposed by Bombay HC

The new board estimated the debt owed by the IL&FS to external creditors to be about Rs 99,354 crore. Of this, 38% of the overall debt – about Rs 35,382 crore – is owed to nationalised banks and another 10% (Rs 9,138 crore) by financial institutions.

Meanwhile, several government agencies including Institute of Chartered Accountants of India (ICAI), Serious Fraud Investigation Office (SFIO) and a forensic audit by Grant Thronton have found serious discrepancies with the auditors’ role including concealing information and overriding accounting standards, besides the fudging by the top management of IL&FS.

Deloitte audited IL&FS Financial Services (IFIN) for 10 years from 2008 to 2018 and BSR, along with Deloitte, did a parallel audit of IFIN for 2017-18.

Govt’s Legal Battle Against Auditors

As the new IL&FS board is working towards the resolution of 347 entities of IL&FS group under the supervision of NCLT, in June 2019, the government appealed the NCLT seeking a five-year ban on the auditors under Section 140 (5) of the Companies Act. The section deals with removal and resignation of auditors and imposes a five-year ban on an auditing firm that is proven to have "acted in a fraudulent manner", or to have "abetted or colluded in any fraud".

Subsequently, the SFIO sought to initiate criminal proceedings against the auditors.

When the NCLT allowed initiation of proceedings as per the government’s request, the auditors approached Bombay High Court and got an interim stay on the NCLT proceedings in September last year.

In its final order on April 21, the Bombay HC ruled in favor of the auditors observing that the provisions of Section 140(5) of the Companies Act are applicable to only “existing” auditors and as Deloitte and BSR had stepped down as auditors of IL&FS in 2018, the court quashed criminal proceeding against the auditors.