Deloitte Haskins & Sells and BSR & Associates (a KPMG network firm), former auditors of IL&FS Financial Services (IFIN), in their replies to the Ministry of Corporate Affairs’ (MCA’s) application seeking a five-year ban on them, have questioned the National Company Law Tribunal’s (NCLT’s) jurisdiction.
The two argued on Friday that the MCA's application was not maintainable as they had already resigned as the firm's auditors. The NCLT asked the ministry to file its response, and will hear the matter on July 15.
On June 10, the MCA had moved an application seeking the removal of the auditors from IFIN and appointment of a statutory auditor. The MCA had also sought to ban both the auditors for five years, after the Serious Fraud Investigation Office (SFIO) revealed that they had connived with IFIN’s former directors in concealing information about the wrongdoings of the management despite having full knowledge of the sorry state.
The tribunal had earlier admitted the MCA's application under Section 140 (5) of the Companies
Act, which says if the tribunal finds that an auditor of a company has acted fraudulently or abetted or colluded in any fraud, it may direct the company to change its auditors. Moreover, if the tribunal passes such an order against the auditor, the auditor will not be eligible to audit any company for five years.
While Deloitte resigned after auditing FY18 accounts, IFIN announced on Thursday that BSR & Associates had quit as statutory auditor of the company. The audit firm had mentioned that it would continue to defend itself in the NCLT on petitions filed by the MCA.
Meanwhile, the tribunal reserved its order on the MCA's application seeking to make other individuals and entities named in the SFIO complaint respondents to the original case. So far, of the 30 people and entities named in the SFIO complaint, only seven have been made respondents in the main petition of the MCA against IL&FS.
The 23 individuals and entities include the auditors and partners in the audit firms, and a few independent directors of IFIN. If they are made respondents, the MCA will seek to freeze assets of these individuals and entities according to the January 16 order of the tribunal.
The SFIO, in its complaint, has 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 MCA alleged 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.