In a setback to international auditors firms Deloitte and KPMG-affiliate BSR Associates, the Supreme Court on May 3 set aside an order of Bombay High Court order that quashed prosecution against Deloitte Haskin and Sells and BSR and Associates, the former auditors of IL&FS Financial Services (IFIN).
The apex court held that the resignation of the auditor does not mean they are not answerable to the courts and tribunals for the accounts statements that they had signed during their tenure.
The judgment of the court was passed in an appeal by the Ministry of Corporate Affairs (MCA) against a 2020 order of the Bombay HC granting relief for the two audit firms that moved court against the government’s decision to ban them from auditing activities for five years and initiate criminal proceedings against them.
The HC observed that the provisions under which the government sought to ban the two firms can only be applied to existing auditors of a company. The government received eight weeks’ time to challenge the order in the apex court.
The High Court observed that the National Company Law Tribunal (NCLT), a part of MCA, cannot ban audit firms. The tribunal had earlier argued that it had jurisdiction to ‘remove and ban’ the auditors even if they had rotated out or resigned.
The case pertains to a series of defaults by IL&FS in 2018, sparking a liquidity crisis in India’s non-banking financial companies sector. Eventually, the government took over the troubled infrastructure lending conglomerate to avoid contagion.
On June 10, the government moved the NCLT seeking a five-year ban on the auditors under Section 140 (5) of the Companies Act for their alleged role in concealing bad loans at IL&FS and its group firms including IFIN.
BSR and Associates, a part of KPMG India, became an auditor to IFIN in November 2017 and jointly audited the company with Deloitte till March 2018. BSR was the sole auditor for IFIN till June 2019, after which it resigned.
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