Amid Concerns over Auditing Practices, Govt Wants to Freeze Auditors’ Accounts in IL&FS Case

The Ministry of Corporate Affairs (MCA) on Tuesday has asked the National Company Law Tribunal (NCLT), Mumbai, to freeze the accounts of the former auditors of an Infrastructure Leasing & Financial Services (IL&FS), Deloitte and BSR Associates, a KPMG affiliate, alongside 21 accounts of individuals accused of financial fraud.

This government’s move demanding stringent action against auditors comes at a time when the auditing firms in India are on a spree of resigning from their jobs especially from companies mired in controversies.

Earlier, to the request for freezing accounts, the government has also asked NCLT to ban these auditing firms for five years for their alleged role in financial irregularities in the IL&FS scam.

While the next hearing in the tribunal is scheduled on August 28, the NCLT will decide the matter after considering the arguments of the auditors’ counsel.

The collapse of IL&FS Group which had nearly Rs one lakh crore outstanding debt has sent shockwaves across the country’s financial system while prompting a crisis in the country’s shadow banking sector. Currently, government agencies have been probing the group’s financial irregularities allegedly committed by the group’s management, auditors and rating agencies among others.

Several ongoing probes into the financial irregularities have unearthed loopholes in the books accounted by the auditors. For instance, Grant Thornton conducted forensic audit of IL&FS financial transactions and found numerous anomalies such as 107 instances of loan evergreening – loans given without proper collateral in the range of over Rs 10,264 crore and at least 10 types of possible fraud by one entity, IL&FS Financial Services Ltd (IFIN), involving a massive Rs 13,299 crore.

Deloitte audited IL&FS Financial Services (IFIN) for 10 years from 2008 to 2018 and BSR, along with Deloitte, did a parallel audit of IFIN for 2017-18.

Coincidentally, when the 2008 global financial crisis started in the United States, the role of accounting practices of the auditors have also come under scanner.

According to Prime Database, the country’s ‘Big four’ audit firms -- PwC, Deloitte, KPMG and EY service a third of India’s listed companies audit business by value as of 2018.

Auditors’ Resignation

Deloitte Haskins & Sells, one of the joint auditors of the cash-strapped Dewan Housing Finance Limited (DHFL), has recently resigned as auditor for the housing finance company. A few days before it quit, Deloitte along with joint auditor Chaturvedi & Shah had complained to the Ministry of Corporate Affairs alleging that the group committed irregularities in granting certain loans during financial year 2018-19.

While this development has further intensified the DHFL crisis, reportedly, the company would require nearly Rs 3,000 crore of new equity investments to infuse its capital base to overcome its liquidity crisis, which experts argue as a potential task ahead for DHFL.

Earlier in June, another big auditor Price Waterhouse & Coopers (PwC) resigned from

Anil Ambani’s Reliance Capital and Reliance Home Finance alleging financial fraud. The two firms are now under the lens of MCA which is currently probing the allegations.

There are instances in the recent past where auditors of  Atlanta Ltd, Manpasand Beverages, Fortis Healthcare, Vakrangee Ltd and Bhushan Steel Ltd, have resigned rather abruptly.

While the main trigger for the auditors behaviour has been the IL&FS crisis, market regulator Securities and Exchange Board of India (SEBI) has proposed a new framework to tackle the issue of auditor resignations from both listed and unlisted companies.  SEBI has now introduced a ‘form’ for auditors to communicate detailed reasons for resignation.