InvestorQ : Why has the government been seeking for a 5-year ban on the two auditors of IL&FS and is it justified in the demand?
Tisha Malhotra made post

Why has the government been seeking for a 5-year ban on the two auditors of IL&FS and is it justified in the demand?

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Moii Chavate answered.
1 year ago

Deloitte Haskins Sells (DHS) and BSR could be the first cases of auditors getting a 5-year ban if the government petition to NCLT succeeds. The government has already moved a petition in the NCLT, which has since been challenged by DHS and BSR. The auditors have raised objections on technical grounds, but the government may prevail in the above case. Let us look at the contention of both the parties in the above case.

Obviously, the auditors have refused to accept the ban as an acceptable punishment for the implosion of IL&FS as the auditors believe that they have done due justice to their jobs. Both the auditors (DHS and BSR) have challenged the government petition on technical grounds. DHS had contended that it had ceased to be an auditor when the proceedings seeking a ban were initiated and the remedy was only available against existing auditors. DHS also contended that since the rules only pertain to existing auditors, they would be out of the definition. BSR, the other auditor, has also raised a similar objection saying that they had ceased to be auditors when the said proceedings had been initiated. The auditor’s counsel has also contended that Section 140 does not allow the NCLT to change the basic definition and interpretation of Section 140, under which the state has filed the petition. That power is only available to the High Court and the Supreme Court of India. While the auditors have sought to quash the ban on purely technical grounds, it must be admitted that the implosion of IL&FS could have been prevented if the auditors had been more vigilant and had raised the appropriate red flags on time.

The counsel appearing for the Ministry of Company Affairs (MCA) has contended that considering the systemic risk posed by the implosion of IL&FS, the focus should be on protecting the integrity of the financial system. Also, the Serious Frauds Investigation Office (SFIO) had noted the lapses back in November 2018. In past cases, the Supreme Court had allowed expansion of the above definition to allow remedial measures against auditors. Essentially, the MCA has drawn on the concept of natural justice to call for a ban on auditors.

The case is still on and the last word may not have been said on the subject. However, this case may have to be looked at from the point of view of setting an example. We saw such auditor negligence in the case of Satyam and again in Kingfisher. Recently, we have also seen in Dewan Housing and Jet Airways. Audit professionals have tried to take umbrage behind their sole accountability to the ICAI, which is also a statutory body. It is high time the auditors (and rating agencies) are held accountable for such cases, which appear to be a case of lapse and connivance. Had the auditors applied better due diligence, the IL&FS fiasco could have been prevented. Effectively, the auditors have failed as a watchdog. The losses to bond holders, shareholders, the financial system and the integrity of capital markets are huge. Auditors will have to take a part of the blame in this case.