The National Company Law Tribunal (NCLT) has gone with the government in the case of imposing a ban on the two statutory auditors of IL&FS, Deloitte Haskins & Sells and BSR & Associates, a local affiliate of KPMG. Deloitte and KPMG are considered top auditing and consulting firms in the world and this action by the Indian government will certainly put a dent on their reputation. The present government is possibly keen to set an example to the others that however mighty they may be, the law should apply and companies must not use auditors to cover up their misdeeds.
In the present case, there was particular ruling at the NCLAT which went in favour of the two audit firms and the Department of Company Affairs filed this application before the NCLT requesting its approval to ban the two audit firms for five years as a penalty for their involvement in the ILFS Group scam.
The audit firms opposed this and took a position that the NCLT is not even authorised to adjudicate on this. NCLT rejected their claim and gave the green signal to the government to go ahead with its proposal to impose the ban. Now they will have to await the order of the NCLAT which has stayed an earlier order of the NCLT which permitted the government to prosecute the two audit firms.
The argument by Deloitte and BSR that they had already resigned as auditors and the particular clause 140 (5) of the Companies Act will apply only to existing auditors was not accepted by the Tribunal.
The current move for imposing a ban has arisen out of a complaint at the Serious Fraud Investigation Office and after the investigation it did emerge that the two audit firms were fully aware of what was happening at IL&FS and IFIN and failed to alert the shareholders. The accusation is moneys were being lent to companies which had already defaulted and to circumvent the norms, the loans to these companies were routed through other group companies.
The counsels for Deloitte and BSR tried their best to argue on behalf of their clients, but the Tribunal would have none of it.
Meanwhile, the names of the new auditors for IL&FS and IFIN were also approved by the NCLT. Borkar & Mazumdar & Co and MM Chitale & Co are the audit firms suggested by the government for IL&FS and IFIN respectively.
Deloitte has reacted to this ruling by the NCLT saying it is unfortunate and that they will study and come up with the next steps to be taken.