Under the ongoing investigations for alleged financial discrepancies at Infrastructure Leasing and Financial Services Ltd (IL&FS), auditors Deloitte Haskins and Sells, and BSR and Co. are being probed by over half a dozen investigative and regulatory agencies in India.
The role of the two auditors came under the scanner after a debt crisis unfolded at the financial giant last September. The investigative authorities were quick to question the auditors in an attempt to unearth the layers of alleged discrepancies.
Since then, the troubles have multiplied for Deloitte and BSR and Co., a KPMG affiliate. With various entities including investigative agencies, regulators and ministry officials launching their own probes into the financial irregularities at IL&FS, the auditors are besieged with chargesheets, petitions, show-cause notices and requests for information.
These include a charge-sheet filed by the Serious Fraud Investigation Office (SFIO) in a sessions court in Mumbai; a petition by the Ministry of Corporate Affairs (MCA) in the National Company Law Tribunal (NCLT) to bar the auditors; a quality review by the National Financial Regulatory Authority (NFRA), a newly minted watchdog for auditors; disciplinary proceedings by the Institute of Chartered Accountants of India (ICAI); a probe by the Securities and Exchange Board of India for the auditors’ role in IL&FS group’s listed entities such as IL&FS Transportation Networks Ltd (ITNL); and finally, a request for information from the Enforcement Directorate, probing a case of money laundering at IL&FS group.
The nine-month probe by SFIO has resulted in an 800-page chargesheet against 30 entities, including directors and auditors of IL&FS Financial Services (IFIN), a non-banking financial company within IL&FS.
Interestingly, in all these cases, the allegations against the auditors are the same—failure to report and flag cases of alleged evergreening of accounts (which resulted in under-provision for loans), misrepresentation of capital adequacy or net-owned Funds and failure to draw attention to so-called circular transactions, or round-tripping of funds and loans.
The audit firms have also been charged with concealing of information by not raising red flags on the misstatements in the accounts of IFIN. The SFIO chargesheet has pointed to evergreening in IFIN accounts and alleges that the auditors colluded with the IL&FS management to conceal information.
While the agencies are pursuing the auditors on the same set of allegations, they are all using different aspects of the law.
“Certain sections of law have some power but may be missing certain other aspects. The thought process is to ensure that the strictest action is taken on the lapses by culpable parties. We do not expect auditors to find everything but these are glaring lapses and need to be prosecuted and penalized accordingly,” said a government official when asked about the need for multiple proceedings. The official requested anonymity.
For instance, SFIO is charging the auditors under Section 447 of the Companies Act, 2013 that pertains to the criminal charge of fraud and can lead to imprisonment, as well as a penalty of nearly 10 times the size of fraud if upheld by the special court that rules on the charges filed by the fraud office. However, this section cannot bar the auditors.
On the other hand, MCA’s petition in NCLT is under Section 140(5) of the Companies Act that gives the ministry powers to ban auditors for five years from all listed and unlisted companies. But this section cannot lead to imprisonment of individual auditors.
Sebi can bar auditors only from listed companies. ICAI, the industry body of auditors under the Chartered Accountants Act, can only act against individual auditors and not against the audit firm. NFRA, which came into existence last year and was meant to act against auditors and do away with legal anomalies, has a stronger set of powers: it can penalize individual auditors and firms under the Companies Act. It can debar an individual or a firm for six months to 10 years. The penalty for an individual auditor is ₹1 lakh to five times the audit fee. For firms, it is ₹10 lakh to 10 times the audit fee.
Curiously, the auditors’ alleged lapses were referred to NFRA by the corporate affairs ministry in the first week of June after SFIO filed its chargesheet on 31 May, as per MCA file notings reviewed by Mint. “This approach is convoluted but don’t think the authorities have another option. Ideally, all of these should have been covered under NFRA, but it is currently facing acute capacity issues. The law drafting is also a concern as one legal provision is not taking care of all alleged violations and possible enforcement action,” said a person who consults with the government on drafting of key policies for financial markets.