The statutory auditors of IL&FS Financial Services (IFIN) who are alleged to have turned a blind eye to the goings-on in the company are in for further trouble as the Ministry of Corporate Affairs (MCA) is pressing ahead with its move to have them punished for their derelictions. The MCA wants to freeze the assets, including bank lockers of these auditors, and has asked for the approval of the National Company Law Tribunal (NCLT) for taking this strong action. The two auditors are Deloitte Haskins & Sells and BSR & Associates, a KPMG-network auditor. Both have been named in the complaint received at the Serious Fraud Investigation Office (SFIO).
As of now, the NCLT has fixed the hearing for August 28, primarily citing that the NCLAT (National Company Law Appellate Tribunal) is seized of the matter and has a hearing on August 19. Though the NCLT had already sanctioned the prosecution of the auditors, they managed to obtain a stay at the Tribunal and now NCLT wants to wait till the Tribunal disposes of the matter. The Mumbai bench of the NCLT made that much quite clear.
The issue is not settled so far with the NCLAT stopping the prosecution of the auditors. It had however said it will not stop any other punitive action the MCA takes within the relevant legal provisions. The current appeal by the MCA to the NCLT may be in response to this order of NCLAT. However, the NCLT does not want to again have a situation where its order is turned down at the Tribunal.
The action proposed by MCA is on the lines of the order issued by NCLT last December placing restrictions on the directors of IL&FS from tinkering with the finances of the firm through subterfuge. MCA says a similar fiat be issued in the case of the auditors too and that only limited amounts be allowed to be drawn by them to meet regular expenses and the accounts be frozen as such. Salaries, electricity bills, transportation and rental costs are some of the heads identified by the ministry. Besides, it has proposed that the directors of the auditing firms may be permitted to draw a maximum of Rs 1 lakh and not more.
The ministryâ€™s appeal to the NCLT includes a request to appoint new auditors for the three companies, Infrastructure Leasing & Financial Services (IL&FS), IFIN and IL&FS Transportation Networks (ITNL).
In another appeal before the NCLT, the MCA has also sought that these defaulting auditors be banned for a period of five years for their collusion with the then management of IL&FS Financial Services (IFIN). The charge here is that the auditors knew the exact position in the company and how the company was continuing to lend to borrowers who had been defaulting on their earlier loans and these were being done through other group companies, which was all known to the auditors. They failed to stop this and to report them as well, which they are mandated to do.
The more serious allegation is the complaint with the SFIO that the auditors falsified the accounts of IFIN for four years, FY-14 till FY-18. This resulted in losses to investors in the non-convertible debentures in the company, the value of which was getting eroded and the auditors failed to report it.